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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
For Annual and Transition Reports Pursuant to
Sections 13 or 15(d) of the Securities Exchange Act of 1934
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED].
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
FOR THE TRANSITION PERIOD FROM ------------------ TO ------------------
Commission file number: 0-21985
SEEC, INC.
(Exact Name of Registrant as Specified in Its Charter)
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PENNSYLVANIA 55-0686906
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
5001 BAUM BOULEVARD, PITTSBURGH, PENNSYLVANIA 15213
(Address of Principal Executive Offices) (Zip Code)
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Registrant's telephone number, including area code: (412) 682-4991
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
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None Not applicable
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of May 30, 1997, the aggregate market value of voting common stock held
by non-affiliates of the registrant, based upon the last reported sale price for
the registrant's Common Stock on the Nasdaq National Market on such date, as
reported in The Wall Street Journal, was $69,152,318 (calculated by excluding
shares owned beneficially by directors and executive officers as a group from
total outstanding shares solely for the purpose of this response).
The number of shares of the registrant's Common Stock outstanding as of the
close of business on May 30, 1997 was 5,003,096.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement of SEEC, Inc. to be used
in connection with the 1997 Annual Meeting of Shareholders (the "Proxy
Statement") are incorporated by reference into Part III of this Annual Report on
Form 10-K to the extent provided herein. Except as specifically incorporated by
reference herein, the Proxy Statement is not to be deemed filed as part of this
Annual Report on Form 10-K.
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ITEM 1. BUSINESS.
SEEC, Inc. (the "Company" or "SEEC") provides a suite of software products
and business solutions for maintaining and redeveloping legacy COBOL software
applications and related databases, including solutions for year 2000
compliance. SEEC also provides solutions for the migration of existing COBOL
applications from mainframe to client/server environments. The Company's
software products and solutions are designed to minimize the time and cost of
maintenance and redevelopment by automating various functions and utilizing
well-defined and repeatable processes.
The Company's software products, which are based on the Company's core
COBOL analysis technology, automate many of the procedures required for COBOL
application maintenance and redevelopment, including year 2000 compliance. In
1992, SEEC introduced the first PC Windows-based product for COBOL maintenance
and redevelopment as an alternative to existing mainframe-based tools. The
Company's products analyze and modify COBOL source code, which is downloaded
from the mainframe to a PC/LAN Microsoft Windows environment where it is stored
in application dictionaries for performance of maintenance and redevelopment
functions. SEEC has also developed software tools that enable customers to
extract business rules and functions from legacy COBOL applications for reuse in
object-oriented client/server environments. SEEC markets and sells its products
and solutions primarily to Fortune 1000 companies and similarly-sized business
and governmental organizations.
INDUSTRY BACKGROUND
GENERAL COBOL MAINTENANCE AND REDEVELOPMENT
Most large business and governmental organizations utilize large mainframe
computer systems for the informational requirements of their businesses. These
systems contain the core knowledge and processes that support the major
operations of these organizations. Examples of such systems include insurance
claims processing systems, airline reservation systems, on-line banking systems,
manufacturing systems and utility billing systems. These computer systems are
primarily run on large, mainframe computers using programs written in the COBOL
programming language. The organizations that rely on these legacy systems
typically have made enormous investments in their systems.
Organizations that rely on large mainframe systems must continually
maintain and redevelop their legacy applications to meet constantly changing
information requirements and to incorporate advances in technologies. The
maintenance and redevelopment process is time consuming and labor intensive.
Industry sources estimate that worldwide there are more than 10,000 IBM
mainframe sites and more than 150 billion lines of COBOL code currently in use.
Industry sources also indicate that a substantial portion of COBOL application
resources are dedicated to the maintenance and redevelopment of these systems.
An immediate maintenance requirement is caused by the inability of most legacy
applications to process accurately calculations and logic involving the year
2000 and beyond.
The use of substantial resources in the maintenance and redevelopment
process limits the resources available to large organizations for other
important informational tasks, such as developing new software applications.
Consequently, many large organizations are seeking to improve the maintenance
and redevelopment process in order to reduce costs, improve productivity and
preserve information systems investments. These trends have resulted in
increased demand for automated software tools for maintenance and redevelopment
that supplement traditional, mostly manual, methods that are often tedious, time
consuming and error-prone. Many organizations lack the internal resources to
incorporate new and developing technologies, train personnel, and develop
efficient methodologies to perform or improve legacy applications maintenance
and redevelopment. As a result, some organizations have outsourced certain
functions to third-party service providers which have developed efficient,
state-of-the-art approaches to legacy system maintenance and redevelopment.
YEAR 2000 OPPORTUNITY
Awareness and recognition of the year 2000 problem has been spreading
rapidly as the millennium approaches. The year 2000 problem relates to the
highly-publicized inability of many existing computer systems to process
information or logic completely or accurately involving the year 2000 and
beyond. The
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problem results from the traditional use of two-digit date fields to perform
computations and decision-making functions. For example, a program using a
two-digit date field may misinterpret "00" as the year 1900 rather than 2000. As
a result, many legacy systems are at risk. For instance, unless year 2000
compliance is completed in certain systems, credit cards and ATM cards will
expire prematurely and insurance policies that span three to seven years cannot
be written. These date-dependent programs are ubiquitous in legacy software
applications used in many critical business operations.
Many organizations lack the internal resources to address adequately the
year 2000 problem in a timely manner. One industry source estimates that the
overall cost of solving the year 2000 problem worldwide will be in the range of
$300 billion to $600 billion. Another industry source estimates that for an
average company with 35,000 programs, it would take 75 to 150 person-years to
complete the necessary analysis and coding for year 2000 compliance, which
translates into a three-year period for a team of 25 to 50 programmers. A number
of solutions providers, including SEEC, have developed special programs to meet
the needs of year 2000 compliance.
SEEC believes that over the next two years most organizations will attempt
to acquire cost-effective solutions for the year 2000 problem. As a result, SEEC
anticipates that demand for year 2000 tools and solutions will grow
significantly. Since the problem requires a large number of programs and systems
to be corrected, it is anticipated that most organizations will not have
adequate internal resources to perform all the year 2000 conversion tasks.
Consequently, most organizations will attempt to utilize highly-automated
solutions and in many cases to outsource the conversion to service providers who
can achieve economies of scale by setting up procedures, or "factories," that
utilize automation tools and well-defined processes for year 2000 compliance. In
addition, SEEC believes that the year 2000 problem will cause many organizations
to explore further the possibility of migrating all or portions of their legacy
systems to client/server systems.
CLIENT/SERVER MIGRATION
As computing technology evolves and information processing requirements
expand, large organizations are seeking to preserve the investment in their
existing systems by integrating their mainframe computers with modern
distributed computer processing architectures, such as client/server systems.
Distributed computing refers to computer transactions that may take place among
different types of computers at one or more locations, thereby permitting
enterprise-wide information exchanges to occur that otherwise might not be
possible. In a client/server environment, a mid-range computer serves as a
network's hub or server. The server is connected to several desktop PCs or
workstations known as "clients" throughout an organization.
SEEC believes that the client/server approach has several benefits over
mainframe-based systems, including user friendliness, flexibility in creating
new applications in response to changes in an organization's informational
requirements, accessibility of corporate data from a variety of databases, and
the ability to present data in a variety of formats. Client/server architectures
are becoming more cost effective as a result of technological advances made in
PCs, networking, disk storage, operating systems and software applications.
SEEC expects many large organizations to adopt a strategy of retaining many
key COBOL applications on existing mainframe systems, migrating all or part of
other existing applications to a client/server environment and pursuing new
application development in both mainframe and client/server environments.
Although the year 2000 problem will require organizations to focus on mainframe
systems maintenance, SEEC anticipates that it will also provide an impetus to
replace some mainframe systems with client/server systems. SEEC anticipates that
many organizations that engage in client/server migration will attempt to reduce
their costs and risks by utilizing software tools that extract business rules
and functions from legacy COBOL applications for reuse in object-oriented
client/server environments. (Object-oriented technology is a new paradigm for
designing a software system by describing the attributes of concepts, things and
actions and then broadly reusing that description and its software code.) SEEC
has developed software tools for this purpose and intends to market and sell its
solutions and tools to new and existing customers engaged in client/ server
migration.
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SEEC'S STRATEGY
SEEC's objective is to become a leading provider of software products and
business solutions for the maintenance and redevelopment of legacy software
applications and related databases. Key elements of the Company's strategy to
achieve its objective are the following:
Broad Based Distribution Strategy. SEEC intends to continue to pursue a
broad based distribution strategy for its software tools and solutions,
including selling directly to end-user customers, licensing to third-party
service providers such as IBM Global Services, Unisys Corporation, Complete
Business Solutions, Inc., Coopers & Lybrand LLP, and others, and utilizing
product distributors.
Customer Partnerships. A key element of the Company's strategy is to work
in partnership with its customers to minimize the time and cost of legacy
application maintenance and redevelopment. SEEC's Smart Change Factory combines
the Company's software tools with well-defined procedures to efficiently utilize
customer information resources. The Smart Change Factory provides a customer
with a complete end-to-end solution and an analytical approach to year 2000
conversion whereby appropriate solutions for different software applications may
be adopted and implemented in order to save the customer time and expense. The
Smart Change Factory approach provides a range of options that address customer
concerns regarding control over critical software applications. End-user
customers have the option of implementing the Company's tools and solutions
in-house or of outsourcing the maintenance work to SEEC or a licensed
third-party service provider. See "Business--Products and Solutions--Smart
Change Factory."
PC/LAN Microsoft Windows-Based Software Tools. SEEC introduced the first
PC-based COBOL maintenance and redevelopment tools in 1992. SEEC believes
PC-based tools offer certain advantages over mainframe-based tools, including
the ability to (i) utilize a graphical user interface that is easier to use and
learn, (ii) analyze source code in a high-performance, interactive PC
environment that conserves valuable mainframe resources and (iii) provide
cost-effective solutions for maintenance and redevelopment.
GROWTH STRATEGY
SEEC believes that year 2000 compliance will significantly increase the
awareness of issues regarding legacy COBOL system maintenance and redevelopment.
In addition, SEEC believes that the trend to outsource certain legacy
application maintenance and redevelopment functions by Fortune 1000 or
similarly-sized companies and government organizations will continue. The
following are key elements of the Company's growth strategy.
Increase Sales to Existing Customers. SEEC intends to increase its sales of
software tools and solutions to existing customers, including year 2000
compliance tools and solutions. Many of SEEC's existing customers are currently
examining the year 2000 problem or are engaged in year 2000 impact assessments
and planning. The Company will also continue to provide customers with tools and
solutions for year 2000 correction and testing.
Target New Customers with Year 2000 Products and Solutions. SEEC intends to
take advantage of the opportunity presented by the year 2000 problem by
vigorously marketing the Smart Change Factory approach to year 2000 compliance
and the benefits of PC-based solutions. In addition to expanding its direct
marketing and sales activities, SEEC intends to establish additional marketing
and distribution channels through additional distributors and strategic
relationships with third-party service providers.
Leverage Expanded Customer Base. SEEC anticipates that the knowledge and
close working relationship it develops with its new and existing customers in
providing solutions for year 2000 compliance will provide additional
opportunities for SEEC to provide tools and solutions for on-going COBOL
maintenance and redevelopment and for the longer-term process of migration from
large mainframe to client/server environments. SEEC believes client/server
systems will be implemented in an object-oriented environment and will create
demand for extracting and reusing business rules. SEEC has already developed
products such as COBOL Slicer and SEEC Object Designer in furtherance of this
aspect of its business strategy. SEEC believes that these opportunities will
sustain growth beyond the year 2000 although there can be no assurance that such
growth will materialize.
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Enhance Technological Leadership and Excellence. SEEC intends to continue
to expand the functionality of its products and solutions by developing new
products and solutions that build on both its core technology and its experience
with maintenance and redevelopment processes. SEEC also plans to pursue
opportunities for product and technology acquisitions or alliances that
complement its existing products or allow expansion into new product areas and
markets.
PRODUCTS AND SOLUTIONS
CORE SOFTWARE TECHNOLOGY
SEEC's software products, which are based on its core COBOL analysis
technology, provide a comprehensive and integrated approach to automating many
of the procedures required for COBOL application maintenance and redevelopment,
including year 2000 compliance. The process utilized by SEEC's core COBOL
analysis technology is described below.
Download. COBOL and related source code resides in libraries on the
mainframe. SEEC utilizes third party tools to download COBOL source code,
database definitions, screen definitions and job control language to a PC or LAN
server for capture into SEEC's application dictionary. SEEC provides interfaces
with source control software to synchronize the sources with the version stored
in the application dictionary.
The Application Capture Facility. The application capture facility
processes the downloaded source code to create an application dictionary that
stores all of the information that represents the data and business logic of
legacy COBOL systems. The Company's software utilizes proprietary parsing and
data flow technology to create the relationships between the entity-related
information reflected in a customer's files and databases, as well as the
processes that use them. Most organizations have very little documentation of
their legacy systems. The application dictionary enables users to understand the
business intent of the existing systems by providing documentation of the legacy
programs. Information about the flow of control among programs is also stored in
the application dictionary, enabling users to group the items by business
function.
Application Dictionary. The application dictionary is a repository that
stores all key design objects in a COBOL application, such as COBOL source code,
database definitions, screen definitions and job control language, which is a
set of instructions which helps the computer to manage the execution of programs
and the use of computer resources.
The Application Analysis Facility. The application analysis facility
performs system and program, impact and logic analysis functions, each of which
is described below:
System and Program Analysis. The application analysis facility
generates several views of programs and systems that help customers
understand the logic of a program or the flow of control between programs
and systems. It provides an interactive graphical view of the logic and
data structures and enables a user to navigate through the application to
locate execution patterns relating to a particular function. Program
execution is simulated through a code walk-through feature whereby a user
can trace program logic without data. It also identifies data and program
anomalies such as dead code and dead data.
Three examples of system and program analysis are control flow, data
structure analysis and documentation. The control flow is based on job
flows or analysis of transaction flow among programs. This documents the
relationships between various program steps in a system and the files and
databases processed in each step. The information regarding the screen
dialog can also be obtained for on-line systems. The data structure
analysis derives graphical views of database schema as represented in
sequential files and databases. The databases which the system and program
analysis facility supports are IBM's Information Management System ("IMS"),
Database/2 ("DB2") and virtual sequential access method ("VSAM"). The user
can view the data definitions and obtain information regarding where a data
structure is used and the transformations performed on data by various
programs. The application analysis facility automatically generates
documentation of programs and systems. Most legacy systems have very little
documentation. The documentation generated by the Company's core COBOL
analysis technology increases the productivity of a programmer who is
required to make changes or enhancements
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to a system unfamiliar to the programmer. Industry standard metrics to
measure complexity of programs are also generated to assist in estimating
effort required to maintain a legacy COBOL system.
Impact Analysis. Impact analysis provides the ability to assess the
impact of making changes to an application by analyzing the data flow and
interrelationships between different components of an application. For
example, this facility assesses the impact of expanding a database from
two-digit date fields to four-digit date fields. The impact analysis will
accurately identify the programs, affected items and affected logical
statements in the application. The application analysis facility supports a
wide range of databases such as IMS, DB2 and VSAM; Computer Associates IDMS
and Software AG's ADABAS. The impact analysis reports can be loaded into
any relational database for further analysis.
Logic Analysis. Logic analysis is used to derive several program views
which can be displayed or printed. Logic analysis is useful in conjunction
with data flow analysis to understand and extract business rules and to
understand and document programs.
PC Test Environment. Once COBOL applications are modified, they must be
tested to ensure proper performance. SEEC's goal is to provide an integrated
workgroup environment for COBOL maintenance in the PC/LAN setting. To facilitate
the programmer's task of using different tools that are customized for the
programmer's installation, the Company's software products interface with
testing tools from other software vendors.
Upload. Third party tools are used to upload the redeveloped COBOL source
code, database definitions, screen definitions and job control language from the
PC/LAN server to the mainframe where additional testing may be performed.
PRODUCTS
SEEC COBOL Analyst. COBOL Analyst is based upon the Company's core COBOL
analysis technology. COBOL Analyst is a PC/LAN-based application maintenance and
redevelopment software tool that is used for performing system-wide change
impact analysis, program and system understanding, business rule extraction and
documentation. Organizations use COBOL Analyst either to enhance existing legacy
applications or to rewrite these applications in a client/server architecture
based on business rules extracted from the legacy application. COBOL Analyst
comes with several additional features to ease maintenance and redevelopment
tasks. COBOL Analyst's Code Walk-thru facility guides programmers through
multiple execution scenarios and records traversed paths for future analysis and
follow-up. The Synonym Processor detects and identifies redundant data across
programs, screens, files and databases in an application. COBOL Analyst's DB2
Analyzer loads and analyzes the DB2 data definitions and the structured query
language ("SQL") embedded within the program in an application with drill-down
capability to explore design details. The Inventory/Analysis tool allows users
to feed system-level cross reference information into a relational database,
enabling programmed and ad hoc queries.
SEEC COBOL Analyst 2000. COBOL Analyst 2000 is an enhanced version of COBOL
Analyst that contains all the capabilities of COBOL Analyst, as well as several
additional features designed to address year 2000 compliance. COBOL Analyst 2000
assists in the assessment, planning and correction phases of year 2000
compliance by accurately identifying date fields in COBOL programs, databases
and screens. The Year 2000 Reports Module of COBOL Analyst 2000 generates impact
analysis reports and provides a cost model for estimating time, labor, and
conversion requirements. COBOL Analyst 2000 is the only product with support for
ADABAS and CA-IDMS databases in addition to IMS, DB2, CICS and VSAM. A special
version of COBOL Analyst 2000 supports Unisys "A" Series COBOL.
SEEC Smart Change 2000. Smart Change 2000 is an automated source renovation
tool that uses a rule-based, expert system approach to convert code for year
2000 compliance in a controlled, well documented manner. Smart Change 2000
incorporates SEEC's extensive knowledge base of commonly-used date rules to
identify the items and statements affected by the year 2000, and uses an expert
system to select the appropriate rule to be applied. Smart Change 2000 modifies
the affected date-related code, replacing it with year 2000 compliant code.
Following renovation, all original source code remains intact and Smart Change
2000 changes are identified by tags that mark the code and explain why a
correction was made (based on the date logic rule). Smart Change 2000 makes
future code maintenance easier by providing this type of
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documentation as a reference for developers. SEEC Smart Change 2000 completed
beta testing in fiscal 1997 and was released for general availability in April
1997.
SEEC COBOL Slicer. COBOL Slicer, which is derived from the core COBOL
analysis technology, utilizes "program slicing" technology to provide an
interactive PC-based slicing tool that increases productivity by enhancing the
understanding of program logic during application redevelopment. COBOL Slicer
assists in the documentation of valuable business rules embedded in legacy COBOL
systems. SEEC's COBOL Slicer allows customers to understand the program, data
structures and input/output screens of an application. Business rules can then
be identified by locating appropriate slicing criteria and understanding the
code slice, control flow and the logical data model. COBOL Slicer is also being
used for testing, including testing for year 2000 compliance. SEEC is currently
enhancing COBOL Slicer to further automate the generation of test cases.
SEEC Date Analyzer. Date Analyzer is a stand-alone product which provides
year 2000 impact analysis for non-COBOL applications. Date Analyzer examines the
various programs or source files across languages using a pattern-matching
scheme and then analyzes the language rules to detect the items and statements
which are potentially affected by the year 2000. Pre-defined language rules can
be extended, and rules may be defined for languages not included as a part of
the product. Currently, Date Analyzer can be used to perform year 2000 analysis
on fifteen programming languages, including Software AG's NATURAL and
Information Builders' FOCUS. The Company intends to enhance Date Analyzer to
analyze other languages as market opportunities present themselves.
SEEC Object Designer. Object Designer is a stand-alone product that
interfaces with the Company's core COBOL analysis technology. Object Designer
utilizes an object modeling technique to represent the business model and
generate the database design for relational databases such as Oracle and Sybase.
Object Designer allows the user to specify methods in C++ language, and generate
objects which are reusable by applications in PC-based visual languages such as
Microsoft's Visual Basic and Sybase's Power Builder. The object model can be
populated by mapping objects to entities in the legacy application using the
application dictionary. Object Designer may be utilized in conjunction with
COBOL Analyst and COBOL Slicer and/or third party software tools to extract
business rules to build reusable objects for client/server migration. Object
Designer is currently in the alpha testing stage of development and has not been
marketed and sold to date. SEEC expects that its first sales of Object Designer
will be in the second half of fiscal 1998.
SMART CHANGE FACTORY
The year 2000 problem presents a significant marketing opportunity for
SEEC. SEEC provides year 2000 compliance solutions through its Smart Change
Factory, a repeatable process that combines the Company's proprietary software
tools with certain third-party software tools and well-defined procedures
designed to efficiently utilize customer information resources. The Company's
Smart Change Factory products and solutions may be integrated with a customer's
existing organization, allowing the customer to retain control of critical
software applications. The Company's products and solutions may also be used for
complete application outsourcing by the customer to SEEC or to licensed
third-party solution providers.
The year 2000 compliance process involves four phases: (1) inventory and
impact assessment, (2) planning, (3) source renovation and (4) testing. The
inventory and impact assessment and source correction phases can be automated to
a greater extent using software tools than the planning and testing phases,
which tend to be more labor intensive and require more expert intervention. The
Company's approach to each of these phases is discussed below.
Inventory and Impact Assessment Phase. This phase, which is highly
automatable, involves identification of the applications, programs, files,
databases and external interfaces that are or may be affected by the use of
two-digit date fields, assessment of potential program or system failures that
may occur, identification of programs that must be corrected, and a preliminary
estimate of the timing and cost of implementing required corrections. SEEC's
COBOL Analyst 2000 automates various functions, including identification of date
items, synonyms and year 2000 affected source code. That information is then
imported to Microsoft Access or other relational databases, and is used to
create a set of technical assessment reports identifying in detail affected
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programs, data items and logic statements, as well as a preliminary estimate of
source correction and testing budgets.
Planning Phase. The planning phase involves analysis of the data generated
in the impact assessment phase in order to generate a comprehensive plan for
implementation of the correction process, including tools and procedures to be
used, sequencing of programs for the correction phase, and test procedures to be
followed. This phase is critical to developing an efficient correction and test
phase plan to minimize customer expenses and maximize utilization of customer
information resources. On an outsourced project, SEEC will work very closely
with the customer during this phase to develop a plan that takes into
consideration the nature of the organization, its informational requirements and
budget constraints. It is during this phase that the Smart Change Factory
approach described below will be applied analytically to determine the most
appropriate correction for each application, which may be program logic changes
for certain applications and date field expansion for others. During the
planning phase SEEC may also recommend phasing out particular programs,
replacement of particular programs, redevelopment of programs, or no correction
at all. COBOL Analyst 2000 is used as an assistance tool in the planning
process, but this process necessarily involves a significant amount of judgment
and decision-making.
Source Renovation Phase. This phase involves implementation of the
corrective steps decided upon in the planning phase. Software tools can
significantly improve productivity in this phase, and SEEC has introduced Smart
Change 2000 to address that need. In the Smart Change Factory process, source
renovation is a well defined, assembly line-like process, with repeatable steps.
Smart Change 2000 uses a rule-based, expert system editing approach in which
program logic changes can be implemented by defining rules for handling
different patterns of data usage.
Testing Phase. In this phase, all corrected and functionally related
programs must be tested to ensure proper functionality and continued operation
using the year 2000 and beyond. SEEC and industry sources estimate that this
phase of the year 2000 compliance process will be the most time consuming, the
most labor intensive and the least susceptible to automation. SEEC is enhancing
its software tools to add features that will automate certain steps in the
testing phase. Testing parameters will vary for each customer, depending on
industry and legacy applications in place.
The Smart Change Factory approach to year 2000 compliance may be
distinguished from the so-called "mass change" approach which involves the
automatic expansion of all two digit date fields in all applications to four
digit date fields. The Smart Change Factory approach, on the other hand,
involves analysis of the impact of the year 2000 on each application and a
determination of the most appropriate solution for each application. Under the
Smart Change Factory approach, the Company's tools are utilized to help
determine the technical feasibility of implementing program logic changes to
particular applications that enable the applications to become year 2000
compliant without expanding date fields. The Company's tools are then utilized
to assist in implementing date field expansion where appropriate and program
logic changes where appropriate. The Smart Change Factory approach typically
involves more time and effort in the planning phase of the process, while the
mass change approach typically involves considerably more time and effort in the
correction and testing phases. Since the source correction and testing phases
tend to be much larger and more labor intensive than the planning phase, the
mass change approach can result in significantly higher costs to the customer.
SEEC'S CLIENT/SERVER MIGRATION SOLUTION
SEEC's client/server migration solution is based on SEEC's redevelopment
process which leverages the entity information and the business rules embedded
in legacy COBOL software applications. SEEC's tools avoid the re-creation of
entity information and business rules, a costly and time consuming process.
SEEC's methodology enables the user to rapidly build an object model utilizing
SEEC's Object Designer product, which reuses information from the legacy COBOL
systems stored in the COBOL Analyst Application Dictionary.
SEEC's client/server solutions are based on a three-tiered architecture
where the business objects created from the legacy COBOL systems in conjunction
with visual and database objects enable a user to
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build an application rapidly. SEEC's redevelopment process enables an
information systems organization to extract business rules for reuse in the
client/server environment using the COBOL Slicer tool.
PRICING OF PRODUCTS AND PROFESSIONAL SERVICES
SEEC's software products are typically licensed to customers. License
agreements generally limit the use of products to a user or number of users. The
LAN license will permit concurrent use which is monitored by the LAN server
component of the product. Some of the software components are licensed for use
on designated servers or a number of servers at a specified site. The
approximate prices for typical five-user workgroup licenses are: for COBOL
Analyst--$40,000, for COBOL Analyst 2000--$70,000, for COBOL Slicer--$75,000,
and for Date Analyzer--$50,000.
Smart Change 2000 pricing is structured differently for end-user customers
versus third-party solution providers who may have established year 2000
"factories" for processing and correcting or renovating their multiple
customers' source code. End-user customers will be charged a license fee for
Smart Change 2000 that is scaled to their total lines of code ("LOC"), with the
license fee increasing as the LOC count increases. Factory pricing for
third-party solution providers has been established as a LOC usage fee which
varies based on the LOC volume processed through the factory utilizing SEEC's
tools and processes. The volumes of LOC processed are monitored by the Company
through the use of programmed devices that attach to the factory computers. SEEC
software is provided to the factories with no license fees, although maintenance
fees are charged based on the applicable list prices for the software. The price
for Smart Change 2000 for a typical end-user will range from $100,000 to
$300,000. Depending on the total LOC, a large end-user customer could pay in
excess of $1 million to license Smart Change 2000. Minimum pricing for factories
is comparable to the typical end-user pricing, however there is no upper limit
on the total cost since pricing is based on lines of code processed through the
factory using Smart Change 2000.
The Company's professional services are generally priced on a
time-and-materials basis. Year 2000 impact assessments are conducted for a fixed
price based on the number of lines of code in a customer's legacy system. A
typical assessment for a Fortune 1000 company is priced in the $100,000 to
$150,000 range. Year 2000 planning and renovation projects, which typically
represent a significantly larger share of the total cost of year 2000
compliance, are priced either on a time-and-material or fixed-price basis.
System integration testing and implementation support is done on a time and
materials basis. Customers generally pay travel and living expenses for SEEC's
personnel working at the customer site.
CUSTOMER AND TECHNICAL SUPPORT
SEEC's standard license agreement does not require SEEC to provide
maintenance for any period of time and does not provide express or implied
warranties for SEEC's product software. SEEC offers maintenance for each of its
products, which entitles the customer to receive technical support and advice,
including problem resolution services, installation assistance, error
corrections and any product enhancements released during the maintenance period.
Maintenance and support services are provided primarily by telephone or e-mail
from SEEC's Pittsburgh, Pennsylvania headquarters.
MARKETING, SALES AND CLIENTS
SEEC markets its products and services primarily to Fortune 1000 companies
and similarly-sized business and governmental organizations. SEEC's marketing
efforts are implemented through its direct sales force utilizing a direct mail
campaign supported by promotion through trade articles and trade shows that
address the software maintenance market. SEEC's marketing efforts are also
implemented through software licenses and other arrangements with service
providers that provide solutions to COBOL maintenance. SEEC sells and supports
its products and services from its Pittsburgh, Pennsylvania headquarters. As of
March 31, 1997, SEEC had 13 employees engaged in sales and marketing.
In fiscal 1997, approximately 16% of the Company's revenues were from sales
to customers outside of the United States, including sales to ERA Software
Systems Private Limited ("ERA"), an affiliated company and distributor in India.
Previously, substantially all of the Company's revenues had come from sales in
the United States.
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<PAGE> 10
Prior to fiscal 1996, SEEC deferred efforts to further develop its sales
and marketing infrastructure due to limited resources and Viasoft Inc.'s
("VIASOFT's") limited exclusive distribution rights, which expired in May 1995.
SEEC has used a portion of the proceeds of its initial public offering to
expand the sales and marketing of its products and services.
SEEC intends to continue to pursue a broad-based distribution strategy for
its software tools and solutions. In addition to making direct sales to end-user
customers, SEEC licenses its products and solutions to several third-party
solution providers such as IBM Global Services, Unisys Corporation, Complete
Business Solutions, Inc., Coopers & Lybrand LLP, and others. These third-party
solution providers utilize the Company's tools and solutions in connection with
COBOL maintenance and redevelopment engagements, including year 2000 compliance,
with their own customers. SEEC also intends to utilize product distributors for
sales of its products. SEEC has a product distribution agreement with ERA.
In November 1993, SEEC entered into a five-year International Software
Marketing and License Agreement (the "VIASOFT Agreement") with VIASOFT, pursuant
to which SEEC granted VIASOFT a worldwide license to use and market all of
SEEC's products that address the COBOL maintenance market, including the COBOL
Analyst product line, but excluding the Year 2000 products, under VIASOFT'S
private label "ESW/PC". The license granted to VIASOFT limited exclusive
marketing rights through June 1, 1995 and non-exclusive rights thereafter.
Pursuant to the VIASOFT Agreement, VIASOFT pays SEEC a royalty of 30% of all
license or maintenance fees related to its distribution of SEEC's products up to
a maximum of $2 million and thereafter a royalty of 25% of license fees and 30%
of maintenance fees related to SEEC's products. During fiscal 1995, 1996 and
1997, revenue from VIASOFT accounted for approximately 13%, 8% and less than 1%,
respectively, of SEEC's total revenue.
SEEC gave notice to VIASOFT on December 3, 1996 of its intention to
terminate the VIASOFT Agreement as a result of VIASOFT'S not making minimum
royalty payments of at least $1,000,000 during the 12 months preceding the third
anniversary of the date of the Agreement. SEEC has received notice from VIASOFT
that it does not intend to extend the VIASOFT Agreement by making such minimum
payments and acknowledging that the VIASOFT Agreement will terminate effective
June 4, 1997. Following such termination date, SEEC will be obligated to provide
VIASOFT with sufficient copies of the licensed products to cover the unearned
advance royalties from VIASOFT. The unearned advance royalties were
approximately $781,000 at March 31, 1997. The estimated cost for SEEC to provide
copies of the licensed products to VIASOFT is approximately $10,000.
The VIASOFT Agreement permitted SEEC to use VIASOFT'S proprietary COBOL
Parser Validation Suite to test SEEC's products. In exchange for such use, SEEC
agreed to pay to VIASOFT a royalty of 5% of SEEC's sales of products which
contain or use a COBOL parser, subject to a maximum royalty payment of $1
million and a minimum royalty payment of $100,000, during the five-year period
ending November 30, 1998.
SEEC has granted several organizations the non-exclusive right to market
SEEC's products in connection with COBOL maintenance and redevelopment
solutions, including year 2000 solutions. SEEC intends to enter into additional
distribution, license and/or marketing agreements, particularly with service
providers or strategic systems integrators, for its software products.
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<PAGE> 11
Following is a partial list of customers and service providers that have
purchased products and/or services from SEEC:
<TABLE>
<CAPTION>
CUSTOMERS SERVICE PROVIDERS
--------- ---------------------
<S> <C> <C>
Aluminum Company of America Mack Trucks, Inc. Complete Business
American Savings Bank Northern Illinois Gas Company Solutions, Inc.
Anthem Insurance Companies, Inc. Olin Corporation Coopers & Lybrand LLP
Bank of New York Rockwell International IBM Global Services
Patni Computer
Foremost Insurance Company Corporation Systems
(through IBM's Integrated Sallie Mae Quasar Professionals
Systems and Solutions Corp.) University of Pittsburgh Satyam Computer
Harris Trust and Savings Bank Weirton Steel Corporation Services Limited
Human Resources Administration-- Wells Fargo Bank Silverline Industries
The City of New York Wheeling-Pittsburgh Steel Unisys Corporation
Human Resources Department--Canada Coporation
Illinois Department of
Employment Security
</TABLE>
During fiscal 1995, revenues from Complete Business Solutions, Inc.
("CBSI") and VIASOFT represented 41% and 13%, respectively, of SEEC's total
revenues. During fiscal 1996, revenues from CBSI, ASD International and
Wheeling-Pittsburgh Steel Corporation accounted for 32%, 14% and 10%,
respectively, of SEEC's total revenues. During fiscal 1997, revenues from CBSI
accounted for 19% of SEEC's total revenues. No other customer accounted for more
than 10% of SEEC's total revenues in fiscal 1995, 1996 or 1997.
COMPETITION
The market for SEEC's software products and solutions, including its
solutions for the year 2000 problem and client/server migration, is intensely
competitive and is characterized by rapid change in technology and user needs
and the frequent introduction of new products. SEEC's principal competitors in
the software tools market include VIASOFT, Micro-Focus Group Public Limited
Company and Computer Associates International, Inc. The Company also competes
with large service providers such as Cap Gemini America, Computer Horizons
Corp., Peritus Software Services, Inc., Millennium Dynamics, Inc., and the Big
Six accounting firms. Certain of these service providers have developed or
acquired proprietary software tools.
SEEC believes that the principal factors affecting competition in the
software tools market include product performance and reliability, product
functionality, ability to respond to changing customer needs, ease of use,
training, quality of support and price. The primary competitive factors in the
solutions markets, including the year 2000 compliance market, are price,
service, the expertise and experience of the service personnel and the ability
of such personnel to provide solutions to applications problems. Other than
technical expertise and, with respect to the year 2000 compliance market, the
limited time available until the year 2000 arrives, there are no significant
proprietary or other barriers to entry that could prevent potential competitors
from developing or acquiring similar tools or providing competing solutions in
the Company's market.
The Company's ability to compete successfully in the sale of products and
solutions will depend in large part upon its ability to attract new customers,
to deliver and support product enhancements to its existing and new customers
and to respond effectively to continuing technological change by developing new
products and solutions. The Company believes that its PC-based tools will enable
it to compete effectively with various other tool vendors, including those that
offer mainframe solutions, in certain segments of the year 2000 market and the
COBOL maintenance and redevelopment market. SEEC believes that its primary
competitive advantages are price, performance and support. The Company believes
that the performance and support advantages of its PC-tools include a graphical
user interface, ease-of-use and portability, coverage and maintenance for a wide
range of platforms, languages and databases, and the accuracy and completeness
of analysis and solutions that its tools provide.
SEEC believes its Smart Change Factory approach offers a comprehensive,
competitive advantage. The Company's Smart Change Factory offers customers time-
and expense-saving options for a complete end-to-
11
<PAGE> 12
end solution and an analytical approach to year 2000 conversions. See
"Business-- Products and Solutions-- Smart Change Factory."
SEEC's PC-based tools are offered at a lower price than mainframe
solutions, provide similar functionality, and also enable valuable mainframe
resources to be conserved because year 2000 compliance and on-going maintenance
and redevelopment functions are performed on the PC.
EMPLOYEES
SEEC had 37 employees as of March 31, 1997, including 13 in sales and
marketing, 10 in research, development and customer support, 9 in professional
services and 5 in corporate operations and administration. In light of SEEC's
plans for continued expansion and growth in order to capture a significant share
of the year 2000 compliance market, the future success of SEEC will depend in
large part upon its continued ability to attract and retain highly skilled and
qualified personnel. Competition for such personnel is intense in the computer
software industry, particularly for talented software developers, service
consultants and sales and marketing personnel.
The Company believes that its future success will depend in large part upon
its ability to attract, retain and motivate highly skilled managerial,
technical, marketing and support personnel. None of the Company's employees are
subject to a collective bargaining agreement. The Company believes that its
relations with its employees are excellent.
INTELLECTUAL PROPERTY
SEEC relies on a combination of copyright, trade secret and trademark laws,
and contractual provisions to establish and protect its rights in its software
products and proprietary technology. SEEC protects the source code version of
its products as a trade secret and as an unpublished copyrighted work. Despite
these precautions, it may be possible for unauthorized parties to copy certain
portions of SEEC's products or reverse engineer or obtain and use information
that SEEC regards as proprietary. SEEC has no patents, and existing copyright
and trade secret laws offer only limited protection. Certain provisions of the
license and distribution agreements generally used by SEEC, including provisions
protecting against unauthorized use, copying, transfer and disclosure, may be
unenforceable under the laws of certain jurisdictions, and SEEC is required to
negotiate limits on these provisions from time to time. In addition, the laws of
some foreign countries do not protect SEEC's proprietary rights to the same
extent as do the laws of the United States. SEEC has been and may be required
from time to time to enter into source code escrow agreements with certain
customers and distributors, providing for release of source code in the event
SEEC breaches its support and maintenance obligations, files bankruptcy or
ceases to continue doing business. SEEC licenses its products for PCs pursuant
to "shrink-wrap" license agreements that are not negotiated with or signed by
licensees and may therefore be unenforceable in certain jurisdictions.
SEEC's competitive position may be affected by its ability to protect its
proprietary information. However, because the software industry is characterized
by rapid technological change, SEEC believes that patent, trademark, copyright,
trade secret and other legal protections are less significant to SEEC's success
than other factors such as the knowledge, ability and experience of SEEC's
personnel, new product and service development, frequent product enhancements,
customer service and ongoing product support.
While SEEC has no knowledge that it is infringing the proprietary rights of
any third party, there can be no assurance that such claims will not be asserted
in the future with respect to existing or future products. Any such assertion by
a third party could require SEEC to pay royalties, to participate in costly
litigation and defend licensees in any such suit pursuant to indemnification
agreements, or to refrain from selling an alleged infringing product or service.
SEEC plans to continue significant research and development to enhance the
functionality and performance of its COBOL Analyst product line. In fiscal 1998,
the emphasis will be on enhancing the automation in source correction for year
2000 compliance for COBOL systems, enhancement of COBOL Slicer for test coverage
analysis, increased support for non-COBOL languages, and enhancement of its
Object Designer product for client/server migration based on customer feedback
and technology trends in the industry.
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<PAGE> 13
SEEC's development of new products has been accomplished primarily with
in-house development personnel and resources in conjunction with ERA. The
initial development of SEEC's COBOL maintenance products was funded in part by a
grant from the Industrial Credit and Investment Corporation of India Limited
("ICICI") pursuant to the Cooperation and Project Financing Agreement dated June
1, 1990 among ICICI, SEEC and ERA (the "Project Financing Agreement"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Project Financing Agreement provided for joint ownership by SEEC and
ERA of all products developed with funds provided thereunder. In March 1996,
SEEC and ERA entered into a Product Purchase Agreement (the "Product Purchase
Agreement"), pursuant to which ERA transferred its ownership interest in SEEC's
products and technologies to SEEC and agreed to assist SEEC in developing new
products and technologies. Pursuant to the Product Purchase Agreement, ERA has
the nonexclusive right to perform design and development work with respect to
SEEC's products pursuant to specified development schedules. In addition, ERA
has agreed to maintain in India the necessary infrastructure and personnel to
support such design and development work. ERA has also agreed to transfer to
SEEC the necessary manpower for product support and to maintain a team of
personnel in India for maintenance of SEEC's products.
SEEC has the right to purchase ERA's research and development facility,
including personnel, equipment and information utilized by ERA for design,
development and maintenance of products, upon the occurrence of certain events
including a change of control of ERA, a termination of the Product Purchase
Agreement by ERA upon twelve months notice, certain defaults by ERA, an initial
public offering by ERA or the failure by the parties to agree upon maintenance
fees after the first six years of the Product Purchase Agreement.
As of March 31, 1997, SEEC had ten employees engaged in product development
and support, and ten employees of ERA were engaged in product development for
SEEC. All of SEEC's research and development employees are located at SEEC's
Pittsburgh, Pennsylvania headquarters. In addition to developing new products,
SEEC continually updates its existing products through enhancements and new
releases.
During fiscal 1995, 1996 and 1997, research and development expenditures,
including research and development fees paid to ERA, were $407,000, $337,000,
and $427,000, respectively.
OTHER
Certain statements in this Form 10-K relate to future events and
expectations and as such constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks and uncertainties and
other important factors that may cause the actual results, performance or
achievements of the Company to be materially different from those described in
or contemplated by such forward-looking statements. Such factors include, in
addition to any uncertainties specifically identified in the text surrounding
such statements and the risks detailed from time to time in the Company's
Securities and Exchange Commission filings, the following:
POSSIBLE FLUCTUATION OF OPERATING RESULTS; FUTURE OPERATING RESULTS UNCERTAIN
The Company has experienced fluctuations in revenue and operating results.
These fluctuations are due, in part, to the budgeting and purchasing practices
of the Company's customers, which affect the volume and timing of product orders
and solution engagements received by the Company. The Company's solutions
business may be characterized by significant customer concentration and
relatively large projects. The timing of product shipments or completion of
customer solution engagements, especially at or near the end of any accounting
period, could cause variations in operating results from period to period and
could result in quarterly losses. In addition, variations in the Company's
revenue and operating results may occur as a result of a number of other
factors, such as employee hiring and utilization rates and the number of working
days in a quarter, demand for the Company's products and solutions, and
competitive conditions in the industry. Many of these factors are not within the
Company's control. Fluctuations in operating results may also adversely affect
and cause volatility in the market price of the Company's Common Stock. The
Company believes that quarter-to-quarter comparisons of its financial results
are not necessarily meaningful and should not be relied upon as an indication of
future performance.
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<PAGE> 14
INTENSE COMPETITION
The market for the Company's software products and solutions, including its
solutions for the year 2000 problem and client/server migration, is intensely
competitive and is characterized by rapid change in technology and user needs
and the frequent introduction of new products. The Company's principal
competitors in the software tools market include VIASOFT, Micro-Focus Group
Public Limited Company and Computer Associates International, Inc. The Company
also competes with large service providers such as Cap Gemini America, Computer
Horizons Corp., Peritus Software Services, Inc., Millennium Dynamics, Inc. and
the Big Six accounting firms. Certain of these service providers have developed
or acquired proprietary software tools. Many of the Company's competitors are
more established, benefit from greater name recognition and have substantially
greater financial, technical and marketing resources than the Company. The
Company believes that the principal factors affecting competition in its markets
include product performance and reliability, product functionality, ability to
respond to changing customer needs, ease of use, training, quality of support
and price. Other than technical expertise and, with respect to the year 2000
compliance market, the limited time available to enter the market, there are no
significant proprietary or other barriers to entry that could keep potential
competitors from developing or acquiring similar tools or providing competing
solutions in the Company's market.
The Company's ability to compete successfully in the sale of products and
solutions will depend in large part upon its ability to attract new customers,
sell products and services, deliver and support product enhancements to its
existing and new customers and respond effectively to continuing technological
change by developing new products and solutions. There can be no assurance that
the Company will be able to compete successfully in the future, or that future
competition for product sales and solutions will not have a material adverse
effect on the business, results of operations and financial condition of the
Company.
UNCERTAINTY OF CURRENT AND FUTURE DEMAND FOR YEAR 2000 SOLUTIONS
The Company is currently focusing significantly on the marketing and sale
of products and solutions for year 2000 assessment, planning, correction and
testing. Although the Company believes that the market for solutions to the year
2000 problem will grow significantly as the year 2000 approaches, there can be
no assurance that this market will develop to the extent anticipated by the
Company. In addition, organizations affected by the year 2000 problem may not be
willing or able to allocate the financial or other resources required to address
the problem in a timely manner. Many organizations may attempt to resolve the
problem internally rather than purchase tools and solutions from outside firms
such as the Company. Due to these factors, development of the market for
solutions to the year 2000 problem is uncertain and unpredictable. If the market
fails to increase, or increases more slowly than anticipated, the Company's
business, operating results and financial condition could be materially and
adversely affected. Furthermore, the demand for year 2000 products and solutions
is likely to diminish rapidly after the year 2000. As a result, the Company
could experience a significant decline in revenues unless it is able to offset
declines in year 2000 related revenues with increased sales of products and
solutions for general legacy system maintenance and redevelopment or for
migration of COBOL applications from mainframe systems to client/server systems.
There can be no assurance that the Company will be able to replace revenues
related to year 2000 products and solutions after the year 2000.
UNCERTAINTY OF MARKET ACCEPTANCE OF SEEC'S PRODUCTS AND SOLUTIONS
Failure of the Company to achieve market acceptance of its products and
solutions will have a material adverse effect on the Company's business, results
of operations and financial condition. Future revenues from sales of products
and solutions are dependent on the use of PCs by large organizations as a
solution platform for COBOL maintenance and redevelopment. Currently most
maintenance and redevelopment software tools are designed for use on mainframe
platforms. The Company believes that PC-based tools and solutions have certain
advantages over mainframe-based solutions but are relatively new and not widely
used. A large number of decision-makers who might evaluate the Company's
products and solutions are experienced in mainframe operating environments and
may not readily accept PC-based products and solutions. Additional marketing and
educational activities will be necessary to convince the COBOL maintenance and
redevelopment market
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<PAGE> 15
of the advantages of PC-based solutions. Failure to achieve wider market
acceptance of PC-based solutions could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's year 2000 products and solutions provide automated solutions
for many year 2000 assessment, planning, correction and testing tasks and
procedures. There can be no assurance that potential customers will perceive the
benefits of automation of various year 2000 compliance tasks, and therefore they
may determine to perform manually all aspects of the year 2000 compliance
process.
The Company has developed products for the migration of existing COBOL
software applications from mainframe to client/server architectures. The Company
has not attempted to market and sell such products to date and there can be no
assurance that they will achieve market acceptance. The Company anticipates that
migration from mainframe systems to client/server systems will be gradual,
particularly for customized applications. Many organizations perceive a high
degree of risk and expense in migrating entire applications from a mainframe to
a client/server. As a result, the market for client/server migration tools and
solutions may not develop to the extent or in the time periods anticipated by
the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend in part upon its ability to hire and
retain key senior management and skilled technical, professional services and
marketing personnel. Although the Company believes it will be able to hire
qualified personnel for such purposes, an inability to do so could materially
adversely affect the Company's ability to market, sell and enhance its products
and solutions. The market for qualified personnel has historically been, and the
Company expects that it will continue to be, intensely competitive. The demand
for experienced COBOL project managers and programmers is expected to continue
to increase significantly over the next several years, particularly as a result
of the year 2000 problem. The Company has recently hired senior financial and
sales managers and intends to hire other senior management personnel in the near
future. The Company's success will depend in part on the successful assimilation
and performance of these individuals. The loss of one or more of its key
employees or the Company's inability to hire and retain other qualified
employees could have a material adverse effect on the Company's business. The
Company has employment agreements with certain key employees, but does not
maintain key man life insurance on any of these persons.
ABILITY TO MANAGE CHANGE AND RAPID GROWTH
The Company expects its business and the industry in which it competes to
continue to undergo rapid change. The Company plans to expand significantly
distribution and marketing capabilities, solutions capabilities, the number of
Smart Change Factories and management and personnel infrastructure. In light of
the business opportunities presented by the year 2000 problem, the Company's
business strategy contemplates rapid growth. If the Company experiences rapid
growth, its ability to be profitable may depend, among other things, on its
ability to manage a large number of personnel, a number of Smart Change
Factories and other maintenance and redevelopment projects concurrently on a
worldwide basis. The failure of the Company's management to respond effectively
to and manage changing technological and business conditions could have a
material adverse impact on the Company's business, results of operations and
financial condition.
ABILITY TO ADDRESS TECHNOLOGICAL CHANGES AND CUSTOMER REQUIREMENTS
The Company's future success will depend significantly on its ability to
enhance its current products and develop or acquire new products to satisfy
evolving industry standards, technological developments and changing customer
needs. There can be no assurance that the Company will be successful in
developing or acquiring product enhancements or new products, that it can
introduce such products or enhancements on a timely basis, or that any such
products or enhancements will be successful in the marketplace. The Company's
delay or failure to develop or acquire technological improvements or to adapt
its products to technological change would have a material adverse effect on its
business, results of operations and financial condition. There can also be no
assurance that new technologies will not be developed by one or more third
parties that render the Company's tools and solutions for COBOL maintenance and
redevelopment or client/server migration technologically obsolete.
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POSSIBLE VOLATILITY OF STOCK PRICE
The Company believes factors such as general conditions in the computer
hardware and software industries and announcements of new products by the
Company or by its competitors may cause the market price of the Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and the shares of technology companies in particular, have
experienced extreme price fluctuations. These broad market and industry
fluctuations, over which the Company has no control, may adversely affect the
market price of the Common Stock.
INABILITY TO PROTECT PROPRIETARY RIGHTS
The Company regards its software products and solutions as proprietary and
attempts to protect them under a combination of copyright, trade secret and
trademark laws as well as by contractual restrictions on employees and third
parties. Despite these precautions, it may be possible for unauthorized parties
to copy the Company's software or to reverse engineer or otherwise obtain and
use information the Company regards as proprietary. The Company has no patents,
and existing trade secret and copyright laws provide only limited protection.
Certain provisions of the license and distribution agreements generally used by
the Company, including provisions protecting against unauthorized use, copying,
transfer and disclosure, may be unenforceable under the laws of certain
jurisdictions, and the Company is required to negotiate limits on these
provisions from time to time. In addition, the laws of some foreign countries do
not protect the Company's proprietary rights to the same extent as do the laws
of the United States. There can be no assurance that the steps taken by the
Company will be adequate to deter misappropriation of proprietary information or
that the Company will be able to detect unauthorized use and take appropriate
steps to enforce its intellectual property rights.
Significant and protracted litigation may be necessary to protect the
Company's intellectual property rights, to determine the scope of the
proprietary rights of others or to defend against claims for infringement.
Although the Company is not currently involved in any litigation with respect to
intellectual property rights, infringement claims against software developers
are likely to increase as the number of functionally similar products in the
market increases. There can be no assurance that third-party claims, with or
without merit, alleging infringement will not be asserted against the Company in
the future. Such assertions can be time consuming and expensive to defend and
could require the Company to cease the manufacture, use and sale of infringing
products and services, to incur significant litigation costs and expenses and to
develop or acquire non-infringing technology or to obtain licenses to the
alleged infringing technology. There can be no assurance that the Company would
be able to develop or acquire alternative technologies or to obtain such
licenses on commercially acceptable terms.
POTENTIAL FOR PRODUCT LIABILITY
The Company's products and solutions relate to key aspects of its
customers' information systems. The Company has never been the subject of a
damages claim related to its products. However, any failure in a customer's
system could result in a claim for substantial damages against the Company,
regardless of the Company's responsibility for such failure. In connection with
the sale of its products and services, the Company attempts to limit
contractually its liability for damages arising from negligent acts, errors,
mistakes or omissions. Despite this precaution, there can be no assurance that
the limitations of liability set forth in its customer contracts would be
enforceable or would otherwise protect the Company from liability for damages.
Additionally, the Company maintains general liability insurance coverage with
limits of $1 million. However, there can be no assurance that such coverage will
continue to be available on acceptable terms, or will be sufficient to cover one
or more large claims, or that the insurer will not disclaim coverage as to any
future claim. The successful assertion of one or more large claims against the
Company that exceed available insurance coverage or changes in the Company's
insurance policies, such as premium increases or the imposition of large
deductible or co-insurance requirements, could materially and adversely affect
the Company's business, operating results and financial condition.
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ITEM 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and
marketing, and research and development operations are located in approximately
6,000 square feet of leased space in Pittsburgh, Pennsylvania. The Company
occupies these premises under a lease expiring in December 1997. In addition,
the Company leases office space in Chicago, Illinois and Cincinnati, Ohio. The
Company anticipates that additional space will be required as its business
expands and believes that it will be able to obtain suitable space as needed.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
From January 22, 1997, the effective date of the Company's initial public
offering, through May 7, 1997, the Common Stock of the Company was traded on the
Nasdaq SmallCap Market tier of the Nasdaq Stock Market under the symbol "SEEC."
Beginning May 8, 1997 the Company's Common Stock began trading on the Nasdaq
National Market under the same symbol. The following table sets forth the range
of high and low sale prices of the Common Stock as reported on the Nasdaq Market
for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
FISCAL YEAR 1997:
Fourth Quarter (ended 3/31/97)................................... $11.25 $7.50
FISCAL YEAR 1998:
First Quarter (through 5/30/97).................................. $21.25 $8.13
</TABLE>
On May 30, 1997, the last reported sale price per share of the Common Stock
on the Nasdaq Market was $18.88. As of such date there were approximately 1,500
holders of record of the Company's Common Stock.
The Company has never declared or paid cash dividends on its capital stock.
The Company currently anticipates that it will retain future earnings, if any,
to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenue $ 456 $ 864 $ 785 $ 1,029 $ 2,623
Loss from operations (375) (173) (339) (287) (481)
Net loss (416) (222) (396) (342) (396)
Loss per share of common stock $ (.16) $ (.08) $ (.15) $ (.13) $ (.13)
Weighted average number of common shares 2,529 2,623 2,624 2,630 3,036
outstanding
Balance Sheet Data:
Working capital (deficit) $ (28) $ 6 $ 187 $ 128 $13,151
Total assets 128 235 583 429 14,058
Advance royalty -- 159 698 796 781
Long-term obligations 702 810 858 1,041 150
Total shareholders' equity (deficit) (720) (942) (1,337) (1,677) 12,344
</TABLE>
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company was founded in 1988 to develop tools and solutions for
maintenance and redevelopment of legacy COBOL applications. In 1992, the Company
commercially introduced its first product, COBOL Analyst. From 1992 to 1996, the
Company devoted significant resources to developing its proprietary suite of
products for COBOL maintenance and redevelopment, including products for year
2000 impact analysis. In 1995 and 1996, the Company introduced its COBOL Analyst
2000, COBOL Slicer, LAN version of COBOL Analyst, and Date Analyzer products.
During the fourth quarter of the fiscal year 1997, the Company completed beta
testing of its source correction tool for year 2000--Smart Change 2000--and
subsequently introduced the tool for general availability. The Company has
continually enhanced its COBOL Analyst product line. The Company began to
increase its commitment to providing year 2000 related professional services in
fiscal year 1996 as a result of the increased awareness of and demand for year
2000 solutions.
The Company derives its revenues primarily from software license fees,
professional services fees and royalties from distributors of the Company's
software products. The Company's software is licensed primarily to Fortune 1000
companies, governmental organizations and service providers. Product related
services are provided to customers in conjunction with its software products,
and other professional services are primarily programming services provided on a
contract basis to similar large organizations. The Company's products and
services are marketed through its sales force directly in the United States and
Canada, and through product distributors, service providers and systems
integrators worldwide. Through fiscal year 1996, substantially all of the
Company's revenues had come from sales in the United States. In fiscal year
1997, approximately 16% of the Company's revenues were from sales to customers
outside the United States.
The Company's revenues from software license fees and product-related
professional services increased significantly in the fiscal year ended March 31,
1997. This increase is attributable to the investments made since July 1995, and
in particular, since the Company's initial public offering in January 1997, in
marketing year 2000 tools and solutions. The Company anticipates that this trend
will continue as it continues to build its sales and marketing infrastructure.
The demand for the Company's year 2000 products and solutions are expected to
increase significantly as market awareness of the year 2000 problem continues to
grow. The Company expects that the knowledge and close working relationships
developed with customers in providing year 2000 solutions will provide
additional opportunities for the Company to provide on-going solutions for COBOL
maintenance and redevelopment and for migration from mainframe to client/server
environments.
The Company anticipates that its revenues from software license fees will
increase not only as a result of increased awareness of the year 2000 problem,
but also as a result of the Company providing VIASOFT with copies of its
software products following termination of its International Software Marketing
and License Agreement with VIASOFT. The $781,000 balance of the unearned advance
royalty from VIASOFT as of March 31, 1997 will be recognized as income by the
Company as copies of the licensed programs are manufactured and delivered to
VIASOFT pursuant to its request. See "Item 1. Business--Sales, Marketing and
Distribution."
Revenues from professional services fees--other are expected to continue to
decrease in significance as the Company shifts its resources and professional
staff from contract programming to year 2000 products and services.
The Company recognizes software license fees upon shipment of the software
to the customer. Revenues from software maintenance are deferred and recognized
straight-line over the contract support period, which is generally one year.
Software maintenance contracts are generally renewable on an annual basis,
although the Company also negotiates long-term maintenance contracts from time
to time. Revenues from professional services are recognized as the services are
provided or on achievement of performance milestones.
18
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain income and expense items.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Software license fees................................................. 37% 26% 42%
Software maintenance fees............................................. 13 10 6
Professional services fees--product related........................... 5 18 29
Professional services fees--other..................................... 45 46 23
--- --- ---
Total revenues................................................... 100 100 100
--- --- ---
Operating expenses:
Cost of software license and maintenance fees......................... 12 10 10
Professional services--product related................................ 1 6 17
Professional services--other.......................................... 31 43 20
General and administrative............................................ 17 13 17
Sales and marketing................................................... 30 23 38
Research and development.............................................. 52 33 16
--- --- ---
Total operating expenses......................................... 143 128 118
--- --- ---
Loss from operations....................................................... (43) (28) (18)
Total other income (expense), net.......................................... (7) (5) 3
Net loss................................................................... (50)% (33)% (15)%
=== === ===
</TABLE>
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1997 AND MARCH 31, 1996
Revenues. Total revenues were $2,623,000 in fiscal 1997, an increase of
155% from $1,029,000 in fiscal 1996. Software license fees were $1,090,000 in
fiscal 1997, an increase of 304% from $270,000 in fiscal 1996. The increase in
software license fees is attributable to the Company's decision to market its
products and solutions directly to end users, and also to increased customer
awareness of the year 2000 problem which resulted in higher demand for the
Company's year 2000 tools and solutions. Software license fees include royalties
from distributors of the Company's products. Royalties were $222,000 in fiscal
1997, compared to $38,000 in fiscal 1996. This increase is attributable to the
commencement of marketing by ERA, the Company's distributor in India, in the
third quarter of fiscal 1996. VIASOFT, the Company's only distributor during the
first two quarters of fiscal 1996, accounted for $16,000 and $21,000 of
royalties in fiscal 1997 and 1996, respectively.
Software maintenance fees were $151,000 in fiscal 1997, an increase of 48%
from $102,000 in fiscal 1996. Software maintenance fees generally correlate with
software license fees. Therefore, the increase in software maintenance fees is
attributable to the increase in software license fees during fiscal 1997.
Professional services--product related revenues increased to $776,000 in fiscal
1997 from $181,000 in fiscal 1996. This increase is primarily attributable to
increased customer awareness of the year 2000 problem and acceptance of the
Company's Smart Change Factory process and tools. The number of customers for
year 2000 services increased from four in fiscal 1996 to twenty-three in fiscal
1997. Revenues from professional services--other were $605,000 in fiscal 1997,
an increase of 27% from $476,000 in fiscal 1996. This increase is attributable
to increased demand for C++ and Windows programming services. The Company
expects that revenues from professional services-other will decline
substantially in fiscal 1998 as it shifts its resources to meet the expected
increase in demand for its year 2000 products and services.
Cost of Revenues. Cost of revenues includes cost of software license and
maintenance fees, cost of professional services--product related and cost of
professional services--other. Included in the cost of software license and
maintenance fees and cost of professional services--product related, are
royalties which
19
<PAGE> 20
the Company pays to ICICI and ERA for those products and services sold, and to
VIASOFT for certain products only. See "Liquidity and Capital Resources."
The Company's total cost of revenue was $1,235,000 in fiscal 1997, an
increase of 106% from $601,000 in fiscal 1996. Cost of software license and
maintenance fees increased 147%, from $102,000 in fiscal 1996 to $252,000 in
fiscal 1997. This increase is primarily attributable to increased royalty
expenses, in particular those payable to ICICI, ERA and VIASOFT. Professional
services--product related costs increased from $59,000 in fiscal 1996 to
$470,000 in fiscal 1997, corresponding to the increase in revenues for year 2000
services discussed above. Professional services--other costs increased by 17%,
from $440,000 in fiscal 1996 to $513,000 in fiscal 1997. The increases in
professional services--product related and professional services--other are both
due to the additional costs of professional staff required to provide the
services.
The Company's gross margin (total revenues less cost of revenues) as a
percentage of revenue was 53% in fiscal 1997 compared to 42% in fiscal 1996.
Gross margin percentages were 80% and 73% for software license and maintenance
fees, 39% and 68% for professional services--product related, and 15% and 8% for
professional services--other, respectively, for fiscal 1997 and fiscal 1996.
Gross margin percentages for software license and maintenance fees will
fluctuate depending on the mix of software products and the varying royalty
expenses associated with those products. In addition, the gross margin
percentages improve as the amount of software license fee revenue increases and
the related costs, such as for customer service, remain fixed or increase at a
slower rate. Furthermore, the gross margin percentage for software license and
maintenance fees was favorably impacted by the elimination of royalty paid to
ERA on product revenues, effective January 1, 1997. The gross margin percentages
for professional services--product related will vary depending on the type of
services provided. Services that are relatively highly automated, such as year
2000 inventory and impact assessments, typically require fewer professional
hours to perform than services involving planning, source correction or testing.
Furthermore, the Company's pricing for product related services will vary based
on the complexity and scope of the engagement, and competitive considerations.
The gross margin percentage of 68% for professional services--product
related in fiscal 1996 was generated from $181,000 in revenues. In contrast, the
gross margin percentage of 39% in fiscal 1997 was generated from $776,000 in
revenues, and is more representative of the gross margin percentage that can be
expected for this category of revenue as it reflects the experience of providing
a wider range of services over a larger number of engagements. The gross margin
percentages for professional services--other will fluctuate based on the prices
of the individual service contracts, the Company's payroll and other costs of
professional staff providing the services, and the proportionate contribution of
each contract to the total revenue for this category in a period. The increase
in gross margin percentage to 15% in fiscal 1997 from 8% in fiscal 1996 is due
to an increased proportion of higher margin contracts.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related employee benefits of the Company's sales,
sales support, and marketing personnel, plus the costs of travel, recruiting,
advertising and promotional activities. Sales and marketing expenses were
$999,000 in fiscal 1997, an increase of 321% from $237,000 in fiscal 1996. This
increase is due primarily to the Company's decision to increase the direct sales
and marketing of its products and solutions to customers. Expenditures for sales
and marketing began to increase during fiscal 1997 in reaction to the year 2000
revenue opportunities. Spending accelerated in the latter part of fiscal 1997,
as funds raised in the Company's initial public offering were used to recruit
and hire sales and sales support personnel, to add two sales offices, and to
increase market awareness of the Company through expanded advertising and
participation in trade shows and conferences.
General and Administrative. General and administrative expenses include the
costs of finance and accounting, rental of office space and other administrative
functions of the Company. General and administrative expenses were $442,000 in
fiscal 1997, an increase of 211% from $141,000 in fiscal 1996. The increase is
due primarily to additional payroll, rent, insurance and professional service
costs, each reflective of the Company's growth.
Research and Development. Total expenditures for research and development
were $427,000 in fiscal 1997 as compared to $337,000 in fiscal 1996, an increase
of 27%. The increase is primarily attributable to the Company's development of
Smart Change 2000, a recently introduced year 2000 source code renovation tool,
and development of product extensions to cover additional platforms, databases
and languages.
20
<PAGE> 21
Interest Expense. Interest expense was $50,000 in fiscal 1997, compared to
$75,000 in fiscal 1996. The expense in both periods includes interest on various
obligations, including notes and advances payable to certain directors and
shareholders, and deferred salaries of two operating officers and shareholders.
Certain of the interest-bearing obligations were converted to shares of the
Company's Common Stock in July 1996, resulting in reduced interest expense for
the remainder of fiscal 1997.
Interest Income. Interest income was $135,000 in fiscal 1997, compared to
$19,000 in fiscal 1996. The increase is due primarily to interest earned on the
net proceeds received in January 1997 from the Company's initial public
offering, which were invested in money market funds and high-grade bonds and
bond funds with average maturities of less than two years.
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1996 AND MARCH 31, 1995
Revenues. The Company's total revenues were $1,029,000 in fiscal 1996
compared to $785,000 in fiscal 1995, an increase of 31%. This growth resulted
principally from an increase in professional services fees related to year 2000
compliance. Total software license fees were $270,000 in fiscal 1996 compared to
$287,000 in fiscal 1995, a decrease of 6%. The decrease reflected the Company's
decision to defer further development of its internal sales infrastructure until
VIASOFT'S limited exclusive distribution rights expired in May 1995 and the
limited resources available to build additional sales infrastructure. Total
distributor royalties were $38,000 in fiscal 1996 as compared to $81,000 in
fiscal 1995, a decrease of 53%. Distributor royalties included $21,000 and
$81,000 in royalties from VIASOFT in fiscal 1996 and 1995, respectively, and,
during fiscal 1996, royalties from ERA's distribution activities in India. The
growth in distributor royalties was affected by VIASOFT'S limited exclusive
distribution rights which restricted the Company from appointing other
distributors until May 1995. Since that time, the Company has pursued a
distribution strategy of licensing its software products to third-party service
providers and to end-user customers.
Maintenance revenue was $102,000 in fiscal 1996 compared to $106,000 in
fiscal 1995, a decrease of 4%. The decrease is attributable to the timing of
recognition of maintenance revenue, typically ratably over a 12-month period
following the software license sale. Software license fee revenue declined in
fiscal 1995 as compared to fiscal 1994, which resulted in reduced maintenance
fees over the following twelve months. Total product-related professional
service fees were $181,000 in fiscal 1996 compared to $42,000 in fiscal 1995, an
increase of 331%. This increase is attributable to the Company's introduction of
year 2000 compliance services and the increase in the demand for these services.
Other professional services revenue was $476,000 in fiscal 1996 compared to
$350,000 in fiscal 1995, an increase of 36%. The increase was attributable to
increased demand for C++ and Windows programming services. The Company does not
expect this rate of increase to be sustained through fiscal 1997 as it shifts
resources to meet the expected increase in demand for its year 2000 products and
services.
Cost of Revenues. The Company's total cost of revenues was $601,000 in
fiscal 1996 compared to $349,000 in fiscal 1995, an increase of $252,000 or 72%.
This increase was primarily attributable to the Company hiring additional
professional staff to meet the increased customer demand for services.
Cost of software license and maintenance fees was $102,000 in fiscal 1996,
an increase of 11% from $92,000 in fiscal 1995. The increase is due to increased
royalty costs and additional material costs related to software license sales
and maintenance. Professional services--product related costs and expenses were
$59,000 in fiscal 1996 compared to $14,000 in fiscal 1995, an increase of 321%.
This is due to the Company's hiring additional professional staff to perform
services. Professional services--other costs increased by $197,000, or 81%, to
$440,000 in fiscal 1996 from $243,000 in fiscal 1995. The increase in costs is
attributable to growth in the volume of services provided, coupled with
increases in personnel costs, including non-recurring recruiting and placement
expenses. The cost of personnel and recruiting and placement expenses are
expected to increase due to anticipated additions to the Company's professional
staff and increased market demand for qualified personnel.
The Company's gross margin as a percentage of revenue was 42% in fiscal
1996 compared to 56% in fiscal 1995. Gross margin percentages were 73% and 77%
for software license and maintenance fees, 68% and 67% for professional
services--product related, and 8% and 31% for professional services--other,
respectively, for fiscal 1996 and fiscal 1995. The four percentage point decline
in gross margin percentage for software license
21
<PAGE> 22
and maintenance fees is attributable to the mix of products sold and the varying
royalty expenses associated with the various products. The gross margin
percentages for professional services--product related were comparable in fiscal
1996 and fiscal 1995. The gross margin percentage for professional
services--other declined by 23 percentage points from fiscal 1995 to fiscal 1996
as a result of the increased personnel costs incurred in fiscal 1996, as
described above.
Sales and Marketing. Sales and marketing expenses were $237,000 in fiscal
1996, approximately equal to expenses of $236,000 in fiscal 1995. These expenses
did not increase between fiscal 1995 and fiscal 1996 due to the Company's
decision not to develop its internal sales infrastructure.
General and Administrative. General and administrative expenses were
$141,000 in fiscal 1996 compared to $132,000 in fiscal 1995, an increase of 7%.
This increase is due primarily to additional costs for accounting services.
Research and Development. Total expenditures for research and development
were $337,000 in fiscal 1996 compared to $407,000 in fiscal 1995, a decrease of
17%. The decline is primarily attributable to the Company's completion of
development of many of its original year 2000 products and the COBOL maintenance
and redevelopment products, and to the resulting temporary reallocation of
personnel to providing professional services.
Interest Expense. Interest expense increased by 19%, to $75,000 in fiscal
1996 from $63,000 in fiscal 1995. The interest expense in fiscal 1996 and 1995
includes interest on various obligations, including indebtedness to ICICI, notes
and advances payable to certain directors and shareholders, and deferred
salaries of two officers. Such notes, advances and deferred salaries were
converted into shares of Common Stock during the second quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering, the Company had funded its operations
and its product development from the following principal sources: (i) proceeds
from the sale of shares of Common Stock, (ii) the ICICI grants and loan
described below, (iii) payments received from the sale of products and services,
including $900,000 in advance royalties from VIASOFT, (iv) proceeds from the
issuance of subordinated and demand notes and (v) deferral of payments of
salaries to the Company's executive officers. As of March 31, 1996, the Company
had working capital of $128,000, total liabilities of $2,106,000 and cash and
cash equivalents of $111,000. During fiscal 1997, $225,000 of the Company's 10%
Subordinated Notes, $220,000 of unsecured notes and advances payable to certain
directors and shareholders, and $127,106 of deferred salaries payable to two
officers, together with accrued interest, were converted into 237,025 shares of
Common Stock. In addition, in the second quarter of fiscal 1997, the Company
sold 211,425 shares of Common Stock in a private placement for an aggregate of
$747,000, and in the fourth quarter of fiscal 1997 sold 2,070,000 shares of
common stock, the net proceeds of which were $12,950,000. As a result of these
transactions, the Company's working capital, total liabilities and cash and
short-term investments at March 31, 1997 had improved to $13,151,000, $1,714,000
and $12,799,000, respectively.
The Company's initial development of its COBOL maintenance products was
funded in part by grants totaling $255,000 from ICICI pursuant to the Project
Financing Agreement. The Project Financing Agreement requires the Company to pay
royalties to ICICI equal to 10% of the Company's gross revenues from product
sales and 5% of gross revenues from maintenance and services, up to a maximum
royalty payment of $525,000. Through March 31, 1997, the Company paid royalties
of approximately $106,000 to ICICI.
During fiscal 1995, the Company funded its operations in part through a
$300,000 term loan from ICICI pursuant to a Term Loan Agreement between the
Company and ICICI dated May 3, 1994 (the "ICICI Loan Agreement"). The loan is
collateralized by the Company's accounts receivable and certain of its tangible
personal property. The loan bears interest at the prime rate (as published in
The Wall Street Journal) plus 2.5% per annum, subject to a maximum rate of 9%
and a minimum rate of 6%. The interest rate applicable to the loan was 9% at
March 31, 1997 and 1996. Interest is payable quarterly on the 15th of each
January, April, July and October. The principal amount of the loan is payable in
quarterly installments of $30,000 each on the 15th of each March, June,
September and December, with the final payment due March 15, 1999. If the
22
<PAGE> 23
Company is in default under the ICICI Loan Agreement, ICICI has the right to
convert all unpaid principal and interest into shares of Common Stock of the
Company at fair value as determined by an independent evaluator. In 1996, the
Company was in default of certain payment and other obligations under the ICICI
Loan Agreement, but as of September 30, 1996 brought such payment obligations
current and received a written waiver from ICICI of all existing and prior
defaults. The Company does not have any indebtedness other than to ICICI and is
not a party to a line of credit.
The Company's cash flows have been used primarily for general operating
expenses, expansion of the sales and marketing infrastructure, equipment
purchases and internal research and development funding. At March 31, 1997 and
March 31, 1996, the Company had cash, cash equivalents, and short-term
investments of $12,799,000 and $111,000 respectively. The Company had a net
deferred tax asset at March 31, 1997 of approximately $915,000, offset by a
valuation allowance of the same amount since the Company has not determined that
it is more likely than not that it will be realized.
The Company has been using the net proceeds of its initial public offering
to market its products and solutions, expand its property and equipment, hire
personnel to market and perform year 2000 compliance services and for working
capital and general corporate purposes. Management believes that cash flows from
operations and the current cash balances will be sufficient to meet the
Company's cash flow needs for fiscal year 1998 and the feasible period
thereafter. In the longer term, the Company may require additional sources of
liquidity to fund future growth. Such sources of liquidity may include
additional equity offerings or debt financing.
INCOME TAX CONSIDERATIONS
At March 31, 1997, the Company had net operating loss carryforwards of
approximately $1.9 million available to reduce federal taxable income through
2012. If an "ownership change" were to occur, within the meaning of the Internal
Revenue Code of 1986, as amended, the utilization of net operating loss
carryforwards would be subject to an annual limitation. Generally, an "ownership
change" occurs with respect to a corporation if shareholders who own, directly
or indirectly, 5% or more of the capital stock of the corporation increase their
aggregate percentage ownership of such stock by more than 50 percentage points
over the lowest percentage of such stock owned by such shareholders at any time
during a prescribed testing period. If the annual limitation were to apply, the
amount of the limitation would equal the product of (i) the fair market value of
the Company's equity on the date of the ownership change, with certain
adjustments, including an adjustment to exclude capital contributions made in
the two years preceding the date of the ownership change and (ii) a long-term
tax exempt bond rate of return published monthly by the Internal Revenue
Service. Should the annual limitation apply, the Company believes that it would
affect the timing of the use of, but not the ultimate ability of the Company to
use, the net operating loss carryforwards to reduce future income tax
liabilities.
OTHER
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," and SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," did not affect the Company's financial position or results of
operations because the Company has not offered such benefits.
SFAS No. 109, "Accounting for Income Taxes," requires a valuation allowance
when it is "more likely than not that some portion or all of the deferred tax
assets will not be realized." It further states that "forming a conclusion that
a valuation allowance is not needed is difficult when there is negative evidence
such as cumulative losses in recent years." The ultimate realization of its
deferred income tax asset depends on the Company's ability to generate
sufficient taxable income in the future. SFAS No. 109 also states that in
determining whether a valuation allowance is necessary, "the weight given to the
potential effect of negative and positive evidence shall be commensurate with
the extent to which it can be objectively verified." The Company has carefully
weighed the positive evidence, primarily actual and projected revenue growth and
anticipated profitability, against the negative evidence of historical net
losses, and concluded that the requirement for objective verification of the
evidence effectively precludes the elimination of some or all of the valuation
allowance as of March 31, 1997.
23
<PAGE> 24
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed of," became effective in 1996. The adoption of this standard did not
have a material effect on the results of operations or the financial position of
the Company.
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for an employee stock option but allows
companies to continue recording compensation cost using currently accepted
measurement principles. Companies electing to continue using currently accepted
recognition principles are required to make pro forma disclosures of net income
as if the fair value based method of accounting had been applied. SEEC continues
accounting for its stock-based employee compensation plans under currently
accepted recognition principles and has presented the pro forma disclosures
required under this statement in 1997.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS No. 128), which
establishes standards for computing and presenting earnings per share. The
effect of adopting FAS No. 128 has not been estimated. The Company is required
to adopt the disclosure requirements of FAS No. 128 during the year ended March
31, 1998.
Inflation is not expected to have a significant effect upon the Company's
business in the near future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 below and the index therein for a listing of financial
statements and supplementary data filed as part of this report.
24
<PAGE> 25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors
SEEC, Inc.
Pittsburgh, Pennsylvania
We have audited the accompanying balance sheets of SEEC, Inc. as of March
31, 1996 and 1997, and the related statements of operations, changes in
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended March 31, 1997. We have also audited the schedule listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SEEC, Inc. as of March 31,
1996 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material
respects, the information set forth therein.
BDO Seidman, LLP
Boston, Massachusetts
June 3, 1997
25
<PAGE> 26
SEEC, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 110,841 $ 3,811,401
Short-term investments (Note 3).................................... -- 8,987,771
Accounts receivable:
Trade--less allowance for doubtful accounts of $7,776 and $10,000
at March 31, 1996 and 1997, respectively (Notes 4 and 10)...... 244,679 872,363
Affiliate--ERA (Notes 6 and 7)................................... 992 84,142
Prepaid expenses................................................... 39,734 178,210
----------- -----------
Total current assets............................................. 396,246 13,933,887
EQUIPMENT, NET (NOTES 5 AND 10)...................................... 27,693 119,565
INVESTMENT IN AFFILIATE (NOTE 6)..................................... 5,000 5,000
----------- -----------
$ 428,939 $14,058,452
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable:
Trade............................................................ $ 60,416 $ 306,778
Affiliate--ERA (Notes 6 and 7)................................... -- 23,650
Accrued payroll, related taxes and withholdings.................... 45,660 21,890
Accrued interest payable (Note 10)................................. 20,250 15,546
Accrued royalties (Note 6)......................................... -- 90,509
Other accrued expenses............................................. 6,514 82,558
Deferred maintenance revenue....................................... 54,103 122,378
Customer advance................................................... 21,330 --
Current maturities of long-term debt (Note 10)..................... 60,000 120,000
----------- -----------
Total current liabilities........................................ 268,273 783,309
Due to officers/shareholders (Notes 11 and 12)..................... 172,477 --
Notes payable to related parties, less current portion (Notes 9 and
11).............................................................. 599,638 --
Long-term debt, less current maturities (Note 10).................. 240,000 120,000
Advance royalty (Note 7)........................................... 796,479 780,552
Accrued royalties (Note 7)......................................... 29,040 30,331
----------- -----------
Total liabilities................................................ 2,105,907 1,714,192
----------- -----------
COMMITMENTS AND CONTINGENCIES
(NOTES 6, 7, 8, 11, 13, 14 AND 16)
SHAREHOLDERS' EQUITY (DEFICIT)
(NOTES 2, 6, 8, 9, 10, 11, 12 AND 15):
Preferred stock--no par value; 10,000,000 shares authorized; none
outstanding
Common stock--$.01 par value; 20,000,000 shares authorized;
2,357,923 and 5,000,833 issued and outstanding at March 31, 1996
and 1997, respectively........................................... 23,580 50,008
Additional paid-in capital......................................... 30,812 14,489,601
Accumulated deficit................................................ (1,731,360) (2,127,749)
Unrealized losses on investments................................... -- (67,600)
----------- -----------
Total shareholders' equity (deficit)............................. (1,676,968) 12,344,260
----------- -----------
$ 428,939 $14,058,452
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 27
SEEC, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
--------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE (Note 4):
Software license fees (Notes 6 and 7)................. $ 287,011 $ 269,589 $1,090,458
Software maintenance fees............................. 105,399 101,868 151,453
Professional services--product related................ 42,355 181,395 776,287
Professional services--other.......................... 349,898 476,413 604,466
---------- ---------- ----------
Total revenue...................................... 784,663 1,029,265 2,622,664
---------- ---------- ----------
OPERATING EXPENSES:
Cost of software license and maintenance fees
(Notes 6 and 7).................................... 91,468 101,991 252,368
Professional services--product related................ 13,952 58,542 470,159
Professional services--other (Note 6)................. 242,921 439,545 512,559
General and administrative (Note 13).................. 132,358 142,058 441,717
Sales and marketing................................... 235,977 236,788 999,496
Research and development (Note 6)..................... 407,231 336,954 427,490
---------- ---------- ----------
Total operating expenses........................... 1,123,907 1,315,878 3,103,789
---------- ---------- ----------
LOSS FROM OPERATIONS.................................... (339,244) (286,613) (481,125)
---------- ---------- ----------
OTHER INCOME (EXPENSE), NET:
Interest expense (Notes 7, 9, 10 and 12).............. (62,866) (74,712) (50,371)
Interest and other income............................. 5,818 19,380 135,107
---------- ---------- ----------
Total other income (expense), net.................. (57,048) (55,332) 84,736
---------- ---------- ----------
NET LOSS (Note 14)...................................... $ (396,292) $ (341,945) $ (396,389)
========== ========== ==========
Net loss per common share............................... $ (.15) $ (.13) $ (.13)
========== ========== ==========
Weighted average number of common and common equivalent
shares outstanding.................................... 2,623,826 2,630,050 3,036,027
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 28
SEEC, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL UNREALIZED TOTAL
NUMBER OF PAID-IN ACCUMULATED LOSSES ON SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INVESTMENTS EQUITY (DEFICIT)
--------- ------- ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance--April 1, 1994 (Note
1).......................... 2,036,750 $20,368 $ 30,353 $ (993,123) $ -- $ (942,402)
Exercise of stock options..... 3,394 34 1,616 -- -- 1,650
Net loss for year............. -- -- -- (396,292) -- (396,292)
--------- ------- ----------- ---------- ------- -----------
Balance--March 31, 1995....... 2,040,144 20,402 31,969 (1,389,415) -- (1,337,044)
Exercise of warrants (Note
11)......................... 91,474 915 1,106 -- -- 2,021
Acquisition of software rights
from affiliate (Note 6)..... 226,305 2,263 (2,263) -- -- --
Net loss for year............. -- -- -- (341,945) -- (341,945)
--------- ------- ----------- ---------- ------- -----------
Balance--March 31, 1996....... 2,357,923 23,580 30,812 (1,731,360) -- (1,676,968)
Issuance of common stock for:
Conversion of notes and
other
long-term liabilities
payable
to related parties (Notes
9 and 12)................. 237,025 2,370 783,165 -- -- 785,535
Cash (Note 15).............. 211,425 2,114 745,326 -- -- 747,440
Initial public offering, less
issuance costs (Note 2)..... 2,070,000 20,700 12,929,054 -- -- 12,949,754
Exercise of warrants (Note
11)......................... 124,460 1,244 1,244 -- -- 2,488
Net loss for year............. -- -- -- (396,389) -- (396,389)
Unrealized losses on
investments................. -- -- -- -- (67,600) (67,600)
--------- ------- ----------- ----------- --------- ------------
Balance--March 31, 1997....... 5,000,833 $50,008 $14,489,601 $(2,127,749) $ (67,600) $ 12,344,260
========= ======= =========== =========== ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 29
SEEC, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-------------------------------------
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $(396,292) $(341,945) $ (396,389)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation..................................... 13,389 14,351 36,050
Provision for doubtful accounts.................. -- 6,836 9,392
Proceeds from advance royalty.................... 620,000 120,000 --
Accrued non-current interest..................... 46,046 46,048 13,420
Accrued non-current royalty...................... 10,785 11,588 1,291
Changes in operating assets and liabilities:
Accounts receivable--trade.................... (26,262) (62,239) (637,076)
Accounts receivable--affiliate................ (16,734) 15,742 (83,150)
Prepaid expenses.............................. (17,260) (21,041) (138,476)
Accounts payable--trade....................... (49,221) 14,020 246,362
Accounts payable--affiliate................... (43,923) -- 23,650
Accrued payroll, related taxes and
withholdings................................ (27,794) 10,860 (23,770)
Accrued interest payable...................... 13,075 7,175 (4,704)
Accrued royalties............................. -- -- 90,509
Other accrued expenses........................ 279 5,972 76,044
Deferred maintenance revenue.................. (2,174) 1,262 68,275
Advance royalty............................... (81,225) (21,177) (15,927)
Customer advance.............................. (43,355) (10,315) (21,330)
--------- --------- -----------
Net cash used by operating activities................... (666) (202,863) (755,829)
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment................................. (18,564) (16,035) (127,922)
Purchase of short-term investments.................... -- -- (9,055,371)
--------- --------- -----------
Net cash used by investing activities................... (18,564) (16,035) (9,183,293)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.......................... 300,000 -- --
Repayment of long-term debt........................... -- -- (60,000)
Proceeds from sale of common stock, net............... -- -- 13,697,194
Exercise of common stock warrants and options......... 1,650 2,021 2,488
--------- --------- -----------
Net cash provided by financing activities............... 301,650 2,021 13,639,682
--------- --------- -----------
Net increase (decrease) in cash and cash equivalents.... 282,420 (216,877) 3,700,560
CASH AND CASH EQUIVALENTS:
Beginning of year..................................... 45,298 327,718 110,841
--------- --------- -----------
End of year........................................... $ 327,718 $ 110,841 $ 3,811,401
========= ========= ===========
Supplemental cash flow information:
Cash paid during the period for interest.............. $ -- $ 19,825 $ 40,500
========= ========= ===========
Purchase of software rights from affiliate (Note 6)... $ -- $ 2,263 $ --
========= ========= ===========
Conversion of debt to common stock (Notes 9 and 12)... $ -- $ -- $ 785,535
========= ========= ===========
Unrealized losses on investments charged to
shareholders' equity (deficit)..................... $ -- $ -- $ 67,600
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 30
SEEC, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business. SEEC, Inc. (the Company) provides a suite of software products
and related services to assist primarily Fortune 1000 companies and
similarly-sized business and governmental organizations in the maintenance and
redevelopment of existing legacy COBOL software applications and related
databases for large mainframe systems. The Company also provides solutions for
the system redevelopment required for year 2000 compliance and to support the
migration of existing COBOL applications from a mainframe to a client/server
environment.
The Company's PC-Windows-based products for COBOL application maintenance
and redevelopment are designed to be alternatives to existing mainframe-based
tools. Marketing efforts are conducted through the Company's direct sales force,
product distributors, and relationships with third-party service providers under
non-exclusive marketing licenses. The Company sells and supports its products
and services from its Pittsburgh, Pennsylvania headquarters.
The Company has a strategic software research and development alliance with
ERA Software Systems Private, Limited (ERA), a software consulting and
development group based in India. The Company and ERA are affiliated through
common ownership (see Notes 6 and 7).
Recapitalization. On January 15, 1997, the Board of Directors effected a
1-for-2.2094 reverse stock split in connection with the January 22, 1997 initial
public offering of the Company's common stock. All shares, options, warrants and
per share amounts in the accompanying financial statements have been adjusted to
reflect the effects of this recapitalization.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Concentrations of Credit Risk. The statements of
cash flows classify changes in cash and cash equivalents (short-term,
highly-liquid investments readily convertible into cash with an original
maturity of three months or less) according to operating, investing or financing
activities. Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of cash, temporary cash
investments and accounts receivable.
The Company places its cash and temporary cash investments with financial
institutions which management considers to be of high quality; however, at times
such deposits may be in excess of the Federal Deposit Insurance Corporation
insurance limit.
Concentrations of credit risk with respect to accounts receivable result
from a significant portion of revenues being derived from a small number of
entities (see Notes 4 and 7); however, the Company's customer base is expanding
and is dispersed across many different industries and geographic areas. The
Company generally extends credit to its customers without requiring collateral;
however, it closely monitors extensions of credit and has not experienced
significant credit losses.
Short-term Investments. Short-term investments consist of short duration
fixed-income securities, primarily U.S. government agency issues and corporate
bonds. The average duration of the short-term investment portfolio of debt
securities is approximately two years. The Company's short-term investments are
classified as available-for-sale and are carried at fair value with the net
unrealized loss reported as a separate component of shareholders' equity.
Realized gains and losses are recognized in the results of operations.
Revenue Recognition. Revenues are derived from the license of software
products, customer support and maintenance contracts, and COBOL maintenance and
redevelopment contracts, including year 2000 compli-
30
<PAGE> 31
ance solutions. Revenue from product sales is recognized upon shipment. Customer
support and maintenance contract revenue is recognized ratably over the term of
the related agreement. The Company provides programming and reengineering
services under time and materials and fixed price contracts. Revenues from time
and materials contracts are recognized as the services are provided. Revenues
from fixed price contracts, which are all less than six months in duration, are
recognized on achievement of specified performance milestones negotiated with
customers. This method, which recognizes revenues on substantially the same
basis as the percentage-of-completion method, is used because management
considers milestones to be the best available measure of progress on these
contracts. Provision for estimated losses on uncompleted contracts is made in
the period in which such losses are determinable (see Note 7).
Equipment. Equipment is stated at cost. Maintenance and repairs which are
not considered to extend the useful life of assets are charged to operations as
incurred.
Depreciation of equipment is calculated using the declining balance method.
Estimated useful lives of assets are as follows: computer equipment--3 to 5
years; software and other equipment--5 years; and furniture and fixtures--5 to 7
years.
Investment in Affiliate. The Company's investment in ERA, which represents
an ownership interest of less than 10%, is accounted for at cost. Management
does not believe that the common ownership interests of the Company and ERA are
sufficient to enable either of them to exert significant influence necessary to
require the Company's investment in ERA to be accounted for under the equity
method of accounting. Further, in management's opinion, the use of the equity
method of accounting would not have a significant effect on the Company's
financial position or results of operations.
Research and Development Costs. Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed" (FAS 86), establishes criteria for capitalization of
software development costs beginning upon the establishment of product
technological feasibility and concluding when the product is available for
general release to customers.
Management believes that in applying the above criteria, capitalizable
costs must be carefully evaluated in conjunction with certain factors including,
among other things, costs reimbursed by the ICICI grant (see Notes 6 and 7),
anticipated future revenues, estimated economic product life, amortization
methodologies, and frequency of changes in software and hardware technologies.
After carefully evaluating these factors, management concluded that the amounts
which should have been capitalized pursuant to FAS 86, specifically costs
incurred after technological feasibility is established and prior to general
release of the software to customers, were immaterial and therefore no software
development costs have been capitalized to date.
Advertising Costs. The Company expenses advertising costs as incurred.
Stock-Based Compensation. The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," which establishes financial accounting and reporting
standards for stock-based employee compensation plans. The Company adopted this
statement during the year ended March 31, 1997; however, it has elected to
continue to account for stock options at their intrinsic value with disclosures
of the effects of fair value accounting on net loss and net loss per share on a
pro forma basis (see Note 8).
Income Taxes. Deferred federal and state income taxes arise from temporary
differences and are accounted for using the asset and liability method to
recognize their tax consequences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in the period
that includes the enactment date (see Note 14).
Net Loss per Common Share. Net loss per common and common equivalent share,
using the weighted average number of common and common equivalent shares
outstanding, was computed in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 83 (SAB 83) by applying the treasury stock method.
Pursuant to SAB 83, common and common equivalent shares issued by the Company
during the 12 months immediately preceding a proposed public offering at prices
substantially below the initial public
31
<PAGE> 32
offering price, together with common share equivalents which result from the
grant of common stock options having exercise prices substantially below the
initial public offering price during the same period, have been included in the
calculation of the shares used in computing net loss per share as if they were
outstanding for all periods prior to the initial public offering.
Common equivalent shares, consisting of warrants and stock options issued
more than 12 months prior to the Company's proposed initial filing date of its
registration statement (October 11, 1996), have not been included in the
computation of net loss per common share because their effect was antidilutive.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS No. 128), which
establishes standards for computing and presenting earnings per share. The
effect of adopting FAS No. 128 has not been estimated. The Company is required
to adopt the disclosure requirements of FAS No. 128 during the year ended March
31, 1998.
Financial Instruments. The estimated fair value of the Company's financial
instruments, which include short-term investments, accounts receivable, accounts
payable and notes payable approximates their carrying value.
Reclassification. Other accrued expenses, which had previously been
included in accounts payable-trade, are now presented separately. All financial
information has been restated to conform with the current year's presentation.
NOTE 2--CAPITAL STOCK AND INITIAL PUBLIC OFFERING
In January 1997 the Company sold, through an underwritten public offering,
1,800,000 common shares. In February 1997, an additional 270,000 shares were
sold pursuant to an underwriters over-allotment provision. The net proceeds of
these sales, which totaled approximately $12,950,000, are expected to be used
for expanded sales and marketing, new personnel, increased capital expenditures,
working capital and other general corporate purposes. In connection with the
initial public offering, the Company issued to underwriters warrants to purchase
additional shares of common stock (see Note 11).
In advance of the initial public offering, the Board of Directors
authorized an amendment of the Company's Articles of Incorporation to increase
the number of authorized shares of common stock to 20,000,000 shares and to
authorize the issuance of 10,000,000 shares of preferred stock, without par
value, issuable in series from time to time by the Board of Directors.
NOTE 3--SHORT-TERM INVESTMENTS
Short-term investments at March 31, 1997 include the following:
<TABLE>
<CAPTION>
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
---------- ------------ ----------
<S> <C> <C> <C>
U.S. Government agency securities............. $2,772,827 $(13,716) $2,759,111
Corporate bonds............................... 250,620 896 251,516
Registered investment company consisting of
U.S. Government and corporate fixed income
securities.................................. 6,031,924 (54,780) 5,977,144
---------- -------- ----------
$9,055,371 $(67,600) $8,987,771
========== ======== ==========
</TABLE>
Management does not anticipate realization of the holding loss in the
upcoming year due to the anticipated adequacy of cash and cash equivalents
currently held to fund current operating requirements.
NOTE 4--MAJOR CUSTOMERS
During the years ended March 31, 1995, 1996 and 1997, a significant
percentage of the Company's revenues was derived from a limited number of
customers. Sales to Complete Business Solutions, Inc. (CBSI) represented
approximately 41%, 32% and 19% of revenues, respectively, for such periods.
Additionally, sales to ASD International (ASD) and Wheeling Pittsburgh Steel
Corporation (WP) represented 14%
32
<PAGE> 33
and 10%, respectively, of revenues in 1996. Sales to VIASOFT represented 13% of
the Company's total revenues for the year ended March 31, 1995. Accounts
receivable from ASD and WP totaled $89,486 at March 31, 1996. Accounts
receivable from CBSI totaled $152,757 at March 31, 1997.
NOTE 5--EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31
---------------------
1996 1997
-------- --------
<S> <C> <C>
Computer equipment............................................ $ 52,393 $145,192
Software and other equipment.................................. 8,707 31,258
Furniture and fixtures........................................ 10,427 22,999
-------- --------
Total equipment............................................... 71,527 199,449
Accumulated depreciation...................................... (43,834) (79,884)
-------- --------
Equipment, net................................................ $ 27,693 $119,565
======== ========
</TABLE>
NOTE 6--TRANSACTIONS WITH AFFILIATE
The Company and ERA developed certain COBOL analysis software products (the
Products) through their cooperative research and development efforts, which were
funded in part through grants from the Industrial Credit and Investment
Corporation of India, Ltd. (ICICI), an investment bank that administers an
agreement between the governments of the United States of America and the
Republic of India. The ongoing process of development of the Products commenced
in 1990 and has been undertaken pursuant to the terms of various agreements
among the Company, ERA and ICICI, which have been amended from time to time to
reflect their evolving relationships.
Until March 31, 1996, the Company had a 65% ownership interest in the
Products and paid a royalty to ICICI (see Note 7), a 10% royalty to ERA based on
revenues from sales or licensing of Products and a monthly research and
development fee of $5,000 to ERA.
Pursuant to a product purchase agreement (the Product Purchase Agreement)
dated March 31, 1996, the Company acquired ERA's 35% interest in the Products in
exchange for 226,305 shares of the Company's common stock. The transaction was
assigned a nominal value of $2,263 to reflect the predecessor basis of ERA in
the Products by applying the Company's accounting policy of expensing all
research and development costs.
Pursuant to the Product Purchase Agreement, the Company agreed to pay the
following to:
- ERA--a research and development fee (royalty) equal to 10% of gross
Product revenues (in no event will quarterly payments be less than
$12,000) through December 31, 1996;
- ICICI on behalf of ERA--5% of gross Product revenues until such aggregate
payments (see Note 7) satisfy ERA's obligation to ICICI (the ERA
Obligation) after which such payments shall cease; and,
- ERA--a monthly maintenance fee of $5,000 for the first three years,
$6,000 for the next three years, and thereafter in amounts to be mutually
determined.
Effective January 1, 1997, the Company and ERA agreed to amend the Product
Purchase Agreement to eliminate the research and development fee (royalty) and
the monthly maintenance fee described above. Concurrently, the Company and ERA
agreed to a schedule of research and development projects to be performed by ERA
at specified rates for the benefit of the Company. The total estimated cost of
the projects pursuant to the initial schedule is $92,000. Other projects may be
added as identified and agreed to by the Company and ERA.
Upon a change in control in ERA, as defined in the Product Purchase
Agreement, the Company has the right to repurchase some or all of its common
stock owned by ERA. In the event of a change in control in the Company, as
defined, ERA has the right to request a renegotiation of any or all of the
research and
33
<PAGE> 34
development provisions of the Product Purchase Agreement. Further, under certain
circumstances, the Company has the right to purchase ERA's research and
development facilities, at which time the Company will assume responsibility for
repayment of any unpaid ERA Obligation under the June 1, 1990 ICICI Agreement
(see Note 7).
The Product Purchase Agreement continues in effect until terminated by
either party and places certain restrictions on ERA's ability to design or
develop similar products for itself or any third party for a period of two years
subsequent to termination. The agreement also provides that all work performed
subsequent to March 31, 1996 by ERA will be done on a work-for-hire basis; any
products developed will be owned by the Company and will not result in any
ownership rights to ERA.
The Company also had an informal arrangement with ERA to administer the
billing and collection function for a contract to provide consulting services to
a corporation operating in the United States, for which the Company retained 10%
of the collected revenues. The related contract expired in December 1996.
Effective March 1, 1996, the Company formalized its marketing arrangements
with ERA by entering into a marketing agreement to distribute the Company's
products on a non-exclusive basis in India. The agreement, which can be
terminated by either party after eighteen months, provides for royalties to be
paid by ERA to the Company based on 40% of revenues (using the suggested
international list prices established by the Company) from customers in India
through September 1, 1996, and 50% thereafter. Royalties received under the
terms of the marketing agreement amounted to $11,500 and $205,799 for the years
ended March 31, 1996 and 1997, respectively.
The Company incurred the following expenses in connection with its
activities with ERA during the periods presented below.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
--------------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Royalty expense...................................... $26,552 $18,941 $ 36,310
======= ======= ========
Research and development fees........................ $60,000 $60,000 $129,218
======= ======= ========
Fees applicable to professional services provided by
ERA employees...................................... $ 5,636 $72,429 $ 77,078
======= ======= ========
</TABLE>
NOTE 7--ROYALTY AGREEMENTS
VIASOFT, Inc.--Effective December 1, 1993, the Company entered into a
five-year license agreement (the License Agreement) with VIASOFT, Inc. (the
Licensee) which generally granted to the Licensee a worldwide license to use and
market certain of the Company's products on a private label basis. The License
Agreement provides, among other things, for royalties of up to 30% of any
license or maintenance fees related to licensed products and minimum advance
royalty payments totaling $900,000 during the eighteen-month exclusivity period
which expired on May 31, 1995.
Pursuant to the terms of the agreement, the Company gave notice to VIASOFT
on December 3, 1996 of its intention to terminate the License Agreement as a
result of VIASOFT's not making minimum royalty payments of at least $1,000,000
during the twelve-month period preceding the third anniversary of the date of
the Agreement. The Company has received notice from VIASOFT that it does not
intend to extend the License Agreement by making such minimum payments and
acknowledging that the License Agreement will terminate effective June 4, 1997.
The $780,552 balance of the advance royalty at March 31, 1997 will be
recognized as income subsequent to such date as the Company fulfills requests
from VIASOFT to manufacture and deliver copies of the licensed products to
VIASOFT for resale. The Company is obligated to deliver to VIASOFT that number
of copies of the licensed products equal to the balance of the advance royalty
divided by the applicable product royalty amounts.
34
<PAGE> 35
The Company has not received any royalty payments beyond the minimum
advance royalty of $900,000, which is being recognized as income as copies of
the licensed products are delivered to VIASOFT for resale, and, to a lesser
extent, as royalties on the related maintenance revenues are reported to the
Company by VIASOFT. Software license fees as presented in the accompanying
statements of operations includes VIASOFT royalty income of $81,225, $21,177 and
$15,927 for the years ended March 31, 1995, 1996 and 1997, respectively.
Total revenues from VIASOFT, including income from the advance royalty,
represented 13%, 8% and 2% of the Company's total revenues for the years ended
March 31, 1995, 1996 and 1997, respectively.
The License Agreement also requires the Company to pay a royalty of 5% of
sales of its products which contain or use a COBOL parser, up to $1,000,000, but
in no event less than $100,000, over five years. Any unpaid royalties will be
paid in twelve monthly installments starting in June 1999.
ICICI--Pursuant to the terms of the June 1, 1990 ICICI agreement, as
amended (the ICICI Agreement), the Company received a $255,000 grant to
partially fund research and development costs to develop the Products in
association with ERA. The grant program administered by ICICI was designed to
accelerate the pace and quality of technological innovation through the
promotion and financing of Indo-U.S. cooperative technology development ventures
(see Note 6). ERA received a grant of Indian Rs. 4,000,000 ($111,480 at March
31, 1997) under the ICICI Agreement for similar purposes.
The ICICI Agreement requires the Company and ERA to make royalty payments
based on Product revenues up to a maximum of $525,000 and Indian Rs. 8,000,000
($222,960 at March 31, 1997), respectively. The Company and ERA are jointly and
severally obligated for payment of the royalties. However, subsequent to March
31, 1993, ICICI agreed to accept from the Company total royalties of 10% of
Product revenues and 5% of revenues from Product maintenance and Product-related
services in satisfaction of future royalties due from the Company and ERA. Total
royalty expense under the ICICI Agreement for the years ended March 31, 1995,
1996 and 1997, amounted to $33,940, $34,006 and $122,585, respectively.
At March 31, 1996 and 1997, the balance of the maximum royalty obligation
to be paid by the Company pursuant to the ICICI Agreement, after deducting
accrued royalties at such dates, was $443,830 and $317,322, and the amount of
the ERA Obligation (see Note 6) was Indian Rs. 6,174,138 ($179,742) and Rs.
3,245,870 ($90,465), respectively.
NOTE 8--STOCK OPTION PLAN
On September 12, 1994, the Company's shareholders approved the SEEC, Inc.
1994 Stock Option Plan (the Plan) under which a maximum of 226,305 common
shares, subject to anti-dilution adjustments, may be awarded during the Plan's
ten-year term. The purpose of the Plan is to promote the interests of the
Company and its shareholders by providing key employees with additional
incentives to continue the success of the Company.
Under the Plan, options are awarded by a committee designated by the
Company's Board of Directors or, if no committee is designated, the full Board.
Incentive stock options and non-qualifying stock options may be granted to
purchase a specified number of shares of common stock at a price not less than
the fair market value on the date of grant and for a term not to exceed ten
years. Options become exercisable at such times and in such installments as
determined at the date of grant, subject to continued employment and certain
other conditions, including a limited ability to sell or otherwise transfer
shares issued pursuant to the Plan.
35
<PAGE> 36
Stock option plan activity during the fiscal years ended March 31, 1995,
1996, and 1997 was as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
--------------------------------------------------------------------
1995 1996 1997
------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
FIXED OPTIONS SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
- ------------- ------ --------- ------ --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................... -- $ -- 27,698 $ .45 49,556 $ .45
Granted........................... 31,092 $ .45 21,858 $ .44 98,709 $4.40
Exercised......................... (3,394) $ .44 -- $ -- -- $ --
Canceled.......................... -- $ -- -- $ -- (1,810) $3.31
------ ------ -------
Outstanding at end of year........ 27,698 $ .45 49,556 $ .45 146,455 $3.08
====== ====== =======
Options exercisable at end of
year........................... 16,384 21,318 34,593
====== ====== =======
Weighted average fair value of
options granted during the
year........................... $ .04 $ .87
</TABLE>
The Company accounts for the Plan using the intrinsic value method.
Accordingly, no compensation cost has been recognized for the Plan. The pro
forma data below reflects the effect had compensation cost for the Plan been
determined based on the fair market value at the grant dates for the awards
under those plans in accordance with SFAS No. 123.
<TABLE>
<CAPTION>
1997
----
<S> <C> <C>
Net Loss As reported.................................... $(396,389)
Pro forma...................................... $(404,389)
Loss per Share As reported.................................... $(.13)
Pro forma...................................... $(.13)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option-pricing model with the following assumptions: risk free
interest rates of 7%, dividend yields of zero, and expected weighted average
terms of 2.1 years. Volatility of 60% was only assumed in the estimation of fair
value for options granted subsequent to the Company's initial public offering.
The estimated fair value of options granted in fiscal 1996 and resultant
compensation cost was not significant.
The following table summarizes information about stock options outstanding
at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE NUMBER CONTRACTUAL PRICE NUMBER PRICE
PRICES OF SHARES LIFE (YEARS) PER SHARE OF SHARES PER SHARE
------ --------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$.44-.49 49,556 7.46 $ .45 34,593 $ .45
$3.31-4.00 83,599 9.64 $ 3.83 -- --
$8.13 13,300 9.96 $ 8.13 -- --
------- ------
146,455 8.93 $ 3.08 34,593 $ .45
======= ======
</TABLE>
During the year ended March 31, 1997, the Company issued non-qualified
options to purchase a total of 11,315 shares of common stock at exercise prices
ranging from $3.62 to $7.25, exercisable as follows: March 31, 1997-2,263; March
31, 1998-4,526; March 31, 1999-4,526.
36
<PAGE> 37
NOTE 9--NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consisted of the following:
<TABLE>
<CAPTION>
MARCH 31
---------------------
1996 1997
-------- --------
<S> <C> <C>
Unsecured note payable to a director with interest at 7% due
June 1996................................................... $ 50,000 $ --
Unsecured note payable to shareholder with interest at 7% due
June 1996................................................... 95,000 --
Unsecured advance from shareholder with imputed interest at
7%.......................................................... 75,000 --
10% subordinated notes due April 1997--Series I............... 100,000 --
10% subordinated notes due September 1997--Series II
(including $25,000 to a director)........................... 125,000 --
Accrued interest.............................................. 154,638 --
-------- --------
$599,638 $ --
======== ========
</TABLE>
In connection with negotiating the terms of the notes and advances payable,
the Company issued warrants, on the basis of one warrant (pre-split) for each
dollar of the loan principal, to purchase 201,403 shares of common stock at $.02
per share (see Note 11).
Interest charged to expense on the notes payable to related parties for the
years ended March 31, 1995, 1996 and 1997 totaled $37,150, $37,152 and $11,054,
respectively.
Effective July 1996, all of the outstanding principal and accrued interest
due to the related parties was converted into 184,198 shares of the Company's
common stock at a value of $3.31 per share. Accordingly, the entire balance of
notes payable is classified as long-term at March 31, 1996.
NOTE 10--LONG-TERM DEBT
The Company is a party to a term loan agreement with ICICI pursuant to
which ICICI made a loan of $300,000 to the Company. The loan bears interest at
the prime rate plus 2.5% (limited to a floor of 6% and ceiling of 9%). Quarterly
principal payments of $30,000 were originally scheduled to commence December 15,
1995. On July 23, 1996, the ICICI term loan agreement was amended to defer the
start of the quarterly payments until December 15, 1996.
The loan is secured by the Company's trade accounts receivable and
equipment. Upon any event of default, the Company may not declare dividends, and
ICICI has the option to convert the then outstanding principal and accrued
interest balance into shares of the Company's common stock at a fair value to be
determined by an independent appraiser.
Aggregate maturities of long-term debt are $120,000 in each of the years
ending March 31, 1998 and 1999.
NOTE 11--COMMON STOCK WARRANTS
At March 31, 1995, 1996 and 1997, the Company had outstanding warrants to
purchase 258,932, 167,458 and 249,998 shares of the Company's common stock,
respectively (see Notes 2, 9 and 12). All warrants are exercisable at $.02,
except for certain warrants outstanding at March 31, 1997 to purchase 207,000
shares of common stock at $8.70 per share. These warrants, which were issued to
the underwriters in connection with the Company's initial public offering, are
not exercisable until January 22, 1998. Warrants for 91,474 and 124,460 shares
were exercised as of March 18, 1996, and March 25, 1997, respectively.
Outstanding warrants expire as follows: December 31, 1999--42,998; January 22,
2002--207,000. At March 31, 1995, 1996 and 1997, 258,932, 167,458 and 249,998
shares of common stock, respectively, were reserved for issuance upon the
exercise of outstanding warrants.
37
<PAGE> 38
NOTE 12--DUE TO OFFICERS/SHAREHOLDERS
A portion of the annual salaries of two officers and shareholders,
aggregating $127,106, was deferred. Interest at 7% has been accrued on the
deferred salaries. The Company also issued warrants, on the basis of one warrant
(pre-split) for each dollar of deferred salary, to purchase 57,529 shares of
common stock at $.02 per share (see Note 11). Interest of $8,896 was charged to
expense during each of the years ended March 31, 1995 and 1996, and $2,595 for
the year ended March 31, 1997. Effective July 1996, the entire balance of
principal and accrued interest was converted into 52,827 shares of the Company's
common stock at a value of $3.31 per share.
NOTE 13--OPERATING LEASES
The Company's headquarters are occupied under an operating lease agreement
which expires December 31, 1997. The Company also rents two apartments and two
remote sales offices under terms of operating leases which have remaining terms
of twelve months or less. Management intends to renew or replace these leases
during the normal course of business. Total rent expense incurred for all leases
during the years ended March 31, 1995, 1996, and 1997 amounted to $20,350,
$23,710 and $48,849, respectively. Current obligations under existing leases
totaled $84,011 at March 31, 1997.
NOTE 14--INCOME TAXES
No provision for income taxes was recorded for the years ended March 31,
1995, 1996 and 1997 due to the Company's significant net operating loss
position. As presented below, the Company has calculated a deferred tax benefit;
however, a corresponding valuation allowance has been recorded to offset the
deferred benefit of net operating loss carryforwards and reversing temporary
differences since management could not determine that it is more likely than not
that the benefit can be realized in the foreseeable future.
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
MARCH 31
-----------------------
1996 1997
--------- ---------
<S> <C> <C>
Net deferred tax asset resulting from using the cash method
of accounting for tax reporting, attributable to:
Accounts payable....................................... $ 27,571 $ 126,577
Deferred maintenance revenue and advance royalty....... 350,950 372,549
Accrued interest payable............................... 90,879 6,414
Accrued royalties...................................... 11,982 49,858
Deferred compensation.................................. 52,444 --
Accounts receivable, net............................... (100,533) (359,937)
Prepaid expenses....................................... (16,394) (73,529)
Other, net............................................. 58,584 13,552
--------- ---------
475,483 135,484
Tax effect of federal and state net operating loss
carryforwards............................................. 263,301 779,169
--------- ---------
Net deferred tax asset...................................... 738,784 914,653
Valuation allowance......................................... 738,784 914,653
--------- ---------
Deferred tax asset, net..................................... $ -- $ --
========= =========
</TABLE>
38
<PAGE> 39
The Company has unused net operating loss carryforwards available at March
31, 1997 that may be applied to reduce future taxable income and expire as
follows:
<TABLE>
<CAPTION>
NET OPERATING LOSS
EXPIRES DURING CARRYFORWARDS
YEAR ENDING -------------------------
MARCH 31 FEDERAL STATE
- -------------- ---------- ----------
<S> <C> <C>
1998......................................................... $ -- $ 630,442
2000......................................................... -- 1,220,429
2006......................................................... 65,955 --
2007......................................................... 70,111 --
2008......................................................... 230,949 --
2010......................................................... 53,743 --
2011......................................................... 255,274 --
2012......................................................... 1,220,429 --
---------- ----------
$1,896,461 $1,850,871
========== ==========
</TABLE>
If an "ownership change" were to occur, within the meaning of the Internal
Revenue Code of 1986, as amended, the utilization of net operating loss
carryforwards would be subject to an annual limitation.
The expected statutory tax benefit of the Company's financial accounting
losses for the years ended March 31, 1995, 1996 and 1997 have not been recorded
due to the uncertainty of their ultimate realization. While the need for the
valuation allowance is subject to periodic review, if the allowance is reduced,
the tax benefits of the carryforwards will be recorded in future operations as a
reduction of the Company's income tax expense.
NOTE 15--RELATED PARTY TRANSACTIONS
In September 1996 the Company sold 4,139 shares of common stock to a
director and 43,450 shares to family members of a director at a value of $3.62
per share, for an aggregate purchase price of $172,440.
NOTE 16--COMMITMENTS AND CONTINGENCIES
The Company has entered into employment/severance (change in control)
agreements with four executive officers and has employment agreements with
certain key employees which provide for minimum annual salaries and automatic
annual renewal at the end of the initial two-year term. The agreements generally
contain, among other things, confidentiality agreements, assignment to the
Company of inventions made during employment (and under certain circumstances
for two years following termination of employment) and non-competition
agreements for the term of the agreements plus two years.
The executive employment/severance agreements provide for payments of up to
one year's compensation if there is a change of control in the Company, as
defined, and a termination of employment. The maximum contingent liability under
these agreements was approximately $363,000 at March 31, 1997.
39
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Executive Officers of the
Registrant," "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders is incorporated herein by reference in response to this
Item 10.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the subcaption "Certain Transactions" in
the Proxy Statement is incorporated herein by reference to this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report
1. FINANCIAL STATEMENTS. The following financial statements of the Company
are filed as part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Report of Independent Certified Public Accountants.............................. 25
Balance Sheets at March 31, 1996 and 1997....................................... 26
Statements of Operations for the years ended
March 31, 1995, 1996 and 1997................................................. 27
Statements of Shareholders' Equity (Deficit) for the years ended
March 31, 1995, 1996 and 1997................................................. 28
Statements of Cash Flows for the years ended
March 31, 1995, 1996 and 1997................................................. 29
Notes to Financial Statements................................................... 30
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II--Valuation and Qualifying Accounts for the years ended
March 31, 1995, 1996 and 1997................................................. 43
</TABLE>
40
<PAGE> 41
3. EXHIBITS. The Exhibits listed below are filed or incorporated by
reference as part of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <S>
3.1* The Registrant's Amended and Restated Articles of Incorporation
3.2* The Registrant's Amended and Restated Bylaws
10.1* SEEC, Inc. 1994 Stock Option Plan
10.2* Cooperation and Project Financing Agreement dated June 1, 1990, as supplemented
and amended, among the Industrial Credit and Investment Corporation of India,
Limited, ("ICICI"), ERA and the Registrant
10.3* Loan Agreement dated June 20, 1994 between ICICI and the Registrant, as amended
10.4* International Software Marketing and License Agreement dated November 29, 1993
between VIASOFT, Inc. and the Registrant, as amended
10.5* Product Purchase Agreement dated as of March 31, 1996 between the Registrant and
ERA
10.6* Marketing Agreement dated as of March 1, 1996 between the Registrant and ERA
10.7* Stock Purchase Agreement dated as of July 15, 1996 among the Registrant, Glen
Chatfield and certain former noteholders of the Registrant
10.8* Stock Purchase Agreement dated as of August 15, 1996 among the Registrant and
certain purchasers of its Common Stock
10.9* Registration Rights Agreement dated as of August 15, 1996 among the Registrant
and certain of its shareholders
10.10* Employment Agreement dated October 1, 1996 between the Registrant and Ravindra
Koka
10.11* Employment Agreement dated October 1, 1996 between the Registrant and John D.
Godfrey
10.12* Employment Agreement dated October 1, 1996 between the Registrant and Richard
J.Goldbach
10.13* Agreement dated July 16, 1996 between the Registrant and Raj Reddy
10.14* Trust Agreement dated August 4, 1992 among the Registrant, Ravindra Koka and Dr.
K. Buddhiraju
10.15 SEEC, Inc. 1997 Stock Option Plan
10.16 Letter Employment Agreement dated December 26, 1996 between the Registrant and
Allen D. Gart
10.17 Amendment dated January 1, 1997 to Product Purchase Agreement between the
Registrant and ERA
11.1 Statement re computation of pro forma earnings per share
27 Financial Data Schedule
</TABLE>
- ---------
* Incorporated by reference from the Registrant's Registration Statement on
Form S-1, File No. 333-14027
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SEEC, INC.
June 27, 1997 By: /s/ RAVINDRA KOKA
----------------------------
Ravindra Koka
President, Chief Executive
Officer, Treasurer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ RAVINDRA KOKA President, Chief Executive Officer, June 27, 1997
- ------------------------------ Treasurer and Director
Ravindra Koka
/s/ JOHN D. GODFREY Vice-President-Professional Services, June 27, 1997
- ------------------------------ Secretary and Director
John D. Godfrey
/s/ RICHARD J. GOLDBACH Chief Financial Officer June 27, 1997
- ------------------------------
Richard J. Goldbach
/s/ RAJ REDDY Chairman of the Board and Director June 27, 1997
- ------------------------------
Raj Reddy
/s/ STANLEY A. YOUNG Director June 27, 1997
- ------------------------------
Stanley A. Young
/s/ RADHA R. BASU Director June 27, 1997
- ------------------------------
Radha R. Basu
/s/ ABRAHAM OSTROVSKY Director June 27, 1997
- ------------------------------
Abraham Ostrovsky
</TABLE>
42
<PAGE> 43
SEEC, INC.
VALUATION AND QUALIFYING ACCOUNTS--SCHEDULE II
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- --------- ---------- ----------- ---------
BALANCE ADDITIONS DEDUCTIONS
AT CHARGED TO CREDITED TO BALANCE
BEGINNING COSTS AND ACCOUNTS AT END
DESCRIPTION OF YEAR EXPENSES RECEIVABLE OF YEAR
- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
MARCH 31, 1995
Allowance deducted from related balance sheet
account--Accounts receivable.................. $ 5,762 $ -- $ 1,827 $ 3,935
========= ======== ======== ========
MARCH 31, 1996
Allowance deducted from related balance sheet
account--Accounts receivable.................. $ 3,935 $6,836 $ 2,995 $ 7,776
========= ======== ======== ========
MARCH 31, 1997
Allowance deducted from related balance sheet
account--Accounts receivable.................. $ 7,776 $9,392 $ 7,168 $10,000
========= ======== ======== ========
</TABLE>
43
<PAGE> 1
EXHIBIT 10.16
CHRISTIAN & TIMBERS
Personal & Confidential
Via Facsimile
December 24, 1996
Mr. Allen D. Gart
25219 Duffield Road
Beechwood, OH 44122
Dear Allen:
On behalf of Ravi Koka and SEEC's Board of Directors, I am pleased to extend an
offer of employment to you to become SEEC's Vice President of Sales. The terms
of the offer letter are outlined below.
(1) SALARY/DRAW FY 1998
Your base salary will be $8,333.33 per month ($100,000 per year) with an
additional non-refundable draw of $2,083.33 per month ($25,000 per year).
(2) BONUS/COMMISSIONS FY 1998
$125,000 bonus/commission above and beyond base and inclusive of the
non-refundable draw of $25,000 will be paid upon meeting a mutually agreed
sales quota. The total sales quota for Fiscal Year 1998, combined of sales and
services revenue, is $10 million, a portion of which shall be your sales quota.
It is the good faith commitment of all parties that within 30 days of your
start date, a compensation plan will be mutually agreed upon defining the exact
portion of your sales quota, the monthly commission payment schedule up to
sales quota achievement and determine the bonus schedule to bonus/commission
inclusive of your non-refundable draw and base salary are hereinafter referred
to as "total target compensation."
(3) SALARY AND COMMISSIONS FOR REMAINDER OF FY 1997
Assuming a start date of your employment sometime shortly after January 1,
1997, you will assume the duties and responsibilities of the Vice President
Sales during the 4th Quarter of SEEC's FY 1997. Your base salary for the 4th
Quarter will be paid at the rate of $10,416.67 per month ($100,000 per year
plus the $25,000 per year non-refundable draw). Additionally, you will receive
a 5% override, payable monthly, on all North American sales excluding
"professional services other" revenue closed during this time period.
(4) SIGN-ON BONUS
We understand that you will be foregoing a potential bonus by leaving your
current employer at the beginning of their fiscal year. We also believe this is
compensated by your pre-IPO stock participation in SEEC. However, in
recognition of the timing of this expected bonus, we will pay you an additional
sign-on bonus of $10,000 predicated on the successful closing of the company's
planned IPO in January. If the IPO doesn't occur as planned, the sign-on bonus
would be paid by June 30, 1997.
<PAGE> 2
Mr. Allen D. Gart
December 26, 1997
(5) EQUITY
A total of 60,000 post-IPO shares, representing approximately 1.3% of the fully
diluted, total shares available, will be granted in the following fashion:
45,000 shares at the pre-IPO price of $4.00 per share to be vested over three
years (15,000/yr.), will be granted at the commencement of employment; an
additional 15,000 shares to be granted at the end of the first twelve months of
employment at an option price to be determined by SEEC's Board of Directors and
tied to meeting specific mutually agreed upon performance criteria and will
vest equally at the end of your second and third year of employment. As a
member of the company's senior management team and based upon future
performance, you will also be eligible to participate in future employee stock
option grants. If there is no IPO in the month of January 1996 as planned, then
1.3% of the fully diluted shares shall be granted to you in a similar fashion.
(6) SEVERANCE
(a) TERMINATION OF EMPLOYMENT
If for any reason, SEEC terminates your employment without cause, by
mutual consent, or if you resign for good reason, you will receive a
severance package at an annualized rate of 50% of your target total
compensation to be paid monthly for a maximum of 12 months, commencing
upon execution of appropriate termination and release agreements and
concluding with the starting date of employment or consulting
arrangement with a new company. For the purpose of this agreement,
"cause" will be defined as negligence, willful misconduct, fraud,
embezzlement and unauthorized use of corporate funds, and "good
reason" will be defined as material diminution by SEEC in either your
title or responsibility as existed prior to change of control, or
material diminution by company in your salary benefits or incentives.
Additionally, you will immediately vest 50% of all unvested stock
options.
(b) ACCELERATED VESTING BASED ON SALE AND TRANSFER OF CONTROL
In the event of the sale of the Company and if the sale results in a
change of control, your vesting schedule will immediately be
accelerated to vest 100% of all unvested stock options.
(c) TERMINATION OF EMPLOYMENT UPON SALE OF COMPANY AND TRANSFER OF
CONTROL
Furthermore, if the Company then terminates your employment or if you
resign for good reason, good reason as defined in (6)a, the Company
agrees to pay you, upon execution of appropriate termination and
release agreements, 75% of your target total compensation in 12 equal
monthly installments.
(7) RELOCATION
It is the intent of SEEC, Inc. to reimburse you and your family for all
reasonable expenses incurred in your relocation from Cleveland, OH to
Pittsburgh, PA. These expenses would include physical move of household goods;
temporary storage of household goods; one house-hunting trip with your spouse
and any other costs associated with your relocation to Pittsburgh.
<PAGE> 3
Mr. Allen D. Gart
December 26, 1997
While it is the intent of SEEC, Inc. to minimize any hardship relocation may
cause to you and your family, it is prudent that these expenses be capped at a
mutually agreed amount based on estimates of the physical move. We would
propose capping this amount at $25,000, that wither would be grossed up to
defray taxes, or directly paid by SEEC to the vendors associated with the move.
Additionally, SEEC agrees to pay the costs of providing you temporary living in
the Pittsburgh area for six months until July 1, 1997.
(8) BENEFITS
You will be entitled to all of the benefits provided to SEEC employees,
including, but not limited to: major medical, dental insurance, disability
insurance, eligibility for SEEC's 401K Plan, and other benefits to be
determined by SEEC's Board of Directors.
Please respond to this offer by sending a signed copy of this letter back to
either myself or Ravi Koka by Thursday, December 26, 1996.
Allen, I look forward to you joining the senior team at SEEC, Inc. and know
that through your efforts and the efforts of the team, a thriving and
successful company will be built.
Sincerely,
/s/ GREGORY L. SELKER /s/ RAVI KOKA
- --------------------- ---------------
Gregory L. Selker Ravi Koka
Vice President & Principal President & CEO
Christian & Timbers SEEC
Employee Acceptance: the signing of this letter acknowledges the acceptance of
the offer contained herein:
/s/ ALLEN D. GART 12/26/96
- ----------------- ---------
Allen D. Gart Date
<PAGE> 1
EXHIBIT 10.17
Amendment to
PRODUCT PURCHASE AGREEMENT
MADE this 1st day of JANUARY 1997, by and between:
SEEC, INC. a Pennsylvania corporation having offices in Pittsburgh, PA,
("SEEC" hereinafter);
AND
ERA SOFTWARE SYSTEMS PRIVATE LIMITED, a corporation existing under the
laws of the Republic of India ("ERA" hereinafter):
WITNESSETH:
WHEREAS, the parties wish to amend the PRODUCT PURCHASE AGREEMENT ("Agreement")
of March 31, 1996;
NOW THEREFORE:
For and in consideration of the mutual covenants contained in that Agreement,
and intending to be legally bound hereby, the parties hereto do further
covenant and agree as follows:
I. That Article IX, sections 5(a), 6 and 7 of the Agreement concerning
"R&D Fees to ERA", "Minimum R & D Fees" and "Maintenance Fees to ERA",
respectively, are considered null and void as of the close of business
December 31, 1996.
II. That Article IX, Section 5(b) of the Agreement concerning payments by
SEEC to ICICI on ERA's behalf remains in full force and effect.
III. That effective January 1, 1997, SEEC will contract for specific R&D
projects to be performed by ERA, including those projects listed in
Exhibit A to this Amendment, at the rates specified in Exhibit A, with
other R&D projects to be determined from time to time by mutual
agreement of the parties. The rates for all such R&D projects will be
reviewed periodically and, if determined necessary and equitable;
adjusted by mutual agreement of the parties.
IV. That all other Articles, sections and provisions of the Agreement
shall remain in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals,
as of the date first above written.
ATTEST: SEEC, INC.
- -----------------------(SEAL) By /s/ K. Ravindra
Secretary or Treasurer -------------------------
President
ATTEST: ERA SOFTWARE SYSTEMS PRIVATE LTD.
- ------------------------- By /s/ Kishore B.V. Buddhiraju
Secretary or Treasurer ----------------------------
President
<PAGE> 1
EXHIBIT 11.1
SEEC, INC.
COMPUTATION OF SHARES USED IN COMPUTING NET INCOME (LOSS)
PER COMMON AND COMMON EQUIVALENT SHARES
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
--------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average number of common and common
equivalent shares not subject to the provisions
of SAB No. 83 - Common shares issued and
outstanding 2,037,431 2,043,655 2,509,691
----------- ----------- ----------
Common and common equivalent shares subject to the
provisions of SAB No. 83:
Issuance of common stock to ERA Software Systems
Private, Ltd. an affiliate, in connection with the
acquisition of software rights 226,305 226,305 226,305
Related party note holders in exchange for principal
and accrued interest 184,198 184,198 184,198
Officers/shareholders in exchange for the outstanding
balance of deferred compensation and accrued
interest 52,827 52,827 52,827
Related parties through private placements 47,589 47,589 47,589
Unrelated third parties through private placements 163,836 163,836 163,836
Common stock equivalents consisting of stock options 64,859 64,859 113,751
Reduction in common and common equivalent shares
through application of the treasury stock method (153,219) (153,219) (262,170)
---------- ---------- ----------
586,395 586,395 526,336
---------- ---------- ----------
Weighted average number of common and common
equivalent shares outstanding 2,623,826 2,630,050 3,036,027
========== ========== ==========
Net loss applicable to common and common
equivalent shares $ (396,292) $ (341,945) $ (396,389)
========== ========== ==========
Net loss per common and common equivalent
share $ (.15) $ (.13) $ (.13)
========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEEC, INC.
STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000925524
<NAME> SEEC, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 3,811,401
<SECURITIES> 8,987,771
<RECEIVABLES> 966,505
<ALLOWANCES> (10,000)
<INVENTORY> 0
<CURRENT-ASSETS> 13,933,887
<PP&E> 199,449
<DEPRECIATION> (79,884)
<TOTAL-ASSETS> 14,058,452
<CURRENT-LIABILITIES> 783,309
<BONDS> 0
0
0
<COMMON> 50,008
<OTHER-SE> 14,422,001
<TOTAL-LIABILITY-AND-EQUITY> 14,058,452
<SALES> 1,090,458
<TOTAL-REVENUES> 2,622,664
<CGS> 1,236,086
<TOTAL-COSTS> 3,103,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,392
<INTEREST-EXPENSE> 50,371
<INCOME-PRETAX> (396,389)
<INCOME-TAX> 0
<INCOME-CONTINUING> (396,389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (396,389)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
